Saving for College
You expect your child to study hard and go to college. But have you done any college savings homework yet?
Why You Should Consider College Planning Now
- Over the decade from 2000-01 to 2010-11, published tuition and fees at public four-year colleges and universities increased at an average rate at 5.6% per year beyond the rate of general inflation1
- The more time your money has to grow, historically speaking, the better your chances of raising the funds needed to pay for college
- If you don’t plan ahead, you could end up dipping into retirement savings or asking your child to take out large student loans
- College is an investment with potentially big returns. The typical bachelor’s degree recipient can expect to earn about 66% more during a 40-year working life than the typical high school graduate earns over the same period2
How to Develop a College Savings Plan
- Set goals: Determine what type of college (junior college, state university or Ivy League) you want your child to attend. Aside from tuition and room and board, factor in “extras” such as books, transportation, a computer or TV.
- Prioritize tax, financial aid and control issues: The amount of money accumulated due to tax savings depends on your tax bracket and how much is actually saved. But, consider that tax savings and financial aid tend to work in opposite directions. Weigh the financial implications of placing college saving in your child’s name and the potential of losing control over those assets when your child is legally considered an adult.
- Determine the account owner: Should you place college savings in your name or your child’s? Consider these important tradeoffs.
- Select the appropriate investments: Choose a college savings option(s) that best matches your needs. Compare features among three popular college savings plans.
- Start saving now: Don’t get paralyzed into inaction if the numbers seem big. The sooner you start saving, the easier it could be to reach your goals. Take a look at our chart below that shows what an initial $5,000 investment, with additional $100 monthly investments, could grow into, depending on when you start.
This chart assumes an initial $5,000 tax-deferred lump sum investment, subsequent $100 monthly tax-deferred investments and a 6% annual rate of return. The calculations are for illustrative purposes only and the results are not indicative of the performance of any investments. The calculations do not reflect any plan fees or charges that may apply. If such fees or charges were taken into account, returns would have been lower. With any long-term investment, investment return may vary. Such automatic investment plans do not assure a profit or protect against losses in declining markets. Investors should consider their long-term financial ability to participate in such a plan.
- Set your college savings goals
- Talk with your financial advisor to develop a college savings strategy that fits your needs
- If you do not have a financial advisor, learn how to find one now. Financial advisors typically charge a fee for their services.
1. The College Board, Trends in College Pricing, 2010. Tuition and Fee and Room and Board Charges over Time
2. The College Board, Education Pays, 2010. Lifetime Earnings
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