THE LIST OF MAJOR financial goals is short, but daunting: Prepare for financial emergencies, save for retirement and buy a home. To this list, many of us need to add one more: Pay for our children’s college education.
Ponder what sort of college your kids might go to—a state university, a typical private college or an elite private college—and find out the likely annual cost. Multiply by four and you’ll have the cost in today’s dollars to send each of your children to college for four years.
How to pay that tab? To get a handle on how much financial aid you might receive, try the student aid quiz at CollegeBoard.org. The quiz will give an estimate of your Student Aid Index, or SIA, an indication of how much financial aid you might receive each year.
If your family is likely to receive hefty amounts of financial aid, you should probably skip the dedicated college fund. Instead, focus on shoring up your own finances by, say, funding retirement accounts, buying a home and paying down debt.
What if you’re unlikely to receive much or any financial aid? Consider socking away money in a 529 college savings plan. That’ll give you tax-free growth, while only putting a modest dent in your aid eligibility. What plan should you use? First, see if you get a tax break for funding your own state’s plan. If you don’t—or if the plan has high costs—you might look elsewhere. You can check out 529 choices at SavingforCollege.com.
To find out how much you might amass by the time your children turn age 18, head to Dinkytown.net and use the Savings, Taxes and Inflation calculator. Assume a 5% annual return. Sound low? Remember, you can’t expect great returns from a college account, because the time horizon is relatively short and you might only be heavily invested in stocks for perhaps the first dozen years. Meanwhile, you might assume a 4% inflation rate. That’s above the past decade’s general inflation rate—but, unfortunately, college costs have indeed been rising faster, so using a 4% inflation rate will give you a better sense for the future purchasing power of the college savings you plan to sock away.
Unless your kids get a full ride or you save the full cost of college, there’s a possibility they will need to take on student loans. Talk to your children about how much it’s prudent to borrow, given their likely career. Will their top college choice involve taking on too much debt relative to their probable future income? Try to steer your children toward less expensive colleges.
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