Saving For College

Most parents want their children to go to college. But many parents identify "paying for college" as their biggest financial concern. College costs are rising faster than inflation and faster than family income. More than ever before, the burden of paying for a college education is falling on the family. This is affecting their decisions about whether to send their child to college and where to have their child enroll.

You may be saying to yourself "Wait a minute...isn't financial aid available to help cover college costs? And isn't the amount of available financial aid going up each year?"

Yes, it is true that student financial aid is available, and it is being awarded in record amounts. Students receive billions of dollars in financial aid every year. Grant and scholarships based on need or merit are funded at the federal, state, and local levels. However, most of the increase in recent years has come in the form of expanded borrowing capacity. In fact, student loan debt now averages more than $23,000 for four-year graduates, and parents are borrowing more each year to cover college costs. This not only places a financial burden on young college graduates, it also makes it more difficult for parents to afford to pay for their younger children to go to college.

One way you can reduce the amount you and your child will need to borrow is to save as much as you can before they enter college. Saving for college is often overlooked as a means for covering college costs. Many families do not begin saving money for college until the student is in middle school or high school. By starting much earlier, even when the student is in elementary school, parents can reduce their future borrowing or provide their child with additional options with regard to their choice of school.

There are many reasons why parents don't save for college. Let's explore a few of them to see if we can correct some misconceptions and give you some new options:

"I don't have any money to save."

Some families live paycheck to paycheck and do not have any money to save toward future college expenses. But in other cases, families can find money to save just by reviewing their expenses and their habits. For example, a two-pack-a-day smoker could save $100 a month by cutting down to one pack a day. Save money by canceling subscriptions to magazines that you never get around to reading. Go "green" to cut back on electricity use. And if you brown-bag it instead of eating out for lunch a few days a week, you may "find" an extra $50 each month. Add it up, and all of a sudden you have the means to start a college fund. The key is to make saving a priority and come up with a plan.

"I don't know where to invest money to save for college."

There are more college savings options now than ever before. Savings accounts through banks and credit unions are easy to set up and manage. Money market accounts and mutual funds can be arranged through financial service providers. Recent changes to the tax laws have provided families with even more opportunities to save – Education IRAs, 529 Plans, and Custodial Accounts are now three of the most popular ways for parents to save money for their children's college education. So as you can see, there are many options available to you when it comes to saving money for college. To determine the best way for you to save, consult your local lender, tax advisor, or financial services provider.

"My child will get scholarships, so I don't need to save for college."

Hopefully, your child will receive many scholarship offers to attend college. But the reality is that seldom will those scholarships cover the entire cost. Even a full tuition scholarship will still leave the student with expenses such as room and board, books and supplies, transportation, and personal needs. Federal and state financial aid programs can help, but often there is still a gap that must be met. These remaining expenses will have to be covered by the family and without savings the family will likely turn to loans.

"If I save money for college, I won't get financial aid."

This may be the biggest myth surrounding the financial aid process. Many parents believe that having money in the bank will prevent them from receiving need-based financial aid. To avoid losing aid, parents will spend money, hide money or invest money in places where even they can't touch it. Even worse, many never bother saving it in the first place. The fact is that parental savings are treated very generously in the financial aid formula.

First of all, assets such as your home and your retirement are not reported on the financial aid forms. So don't worry about how much your home is worth or how much you have invested in your retirement plan. For all other assets (cash, savings, checking, mutual funds, money market accounts, rental properties, etc.), an allowance is applied to protect a large portion of your assets. In fact, in most cases parental assets don't count at all.

The principles of saving for college are the same as those for retirement or other purposes. Time and consistency are your greatest allies. Begin saving early (as early as elementary school or sooner) and invest on a regular basis (such as through automatic monthly deductions from your checking account) and you will be well on your way to developing an effective college savings plan. Use our Savings Calculator to see how this strategy will allow your college savings to grow almost as quickly as your child will!

There is just one catch – your child is not getting any younger! The clock is ticking, so start your college saving plan today.