Paying for college

Here's how to begin socking away money for your child's education


Published: Sunday, January 11, 2004 at 6:01 a.m.
Last Modified: Sunday, January 11, 2004 at 1:08 a.m.

Thomas McCarver knew he needed to get started on his daughter's college savings.

Morgan was 3 months old. So McCarver took his family's income tax refund to a local financial adviser and invested it. Soon after, he began putting $125 per month into college savings for Morgan, who is now 7.

He increased the investment to $200 per month and added even more when Leigh Marie was born four years later.

With the prospect of paying college tuition for eight straight years - at an estimated cost of more than $150,000 - McCarver is happy that he started early, even if the market troubles of the past few years hurt the balances of those savings accounts.

"Year after year, we just kept shoving money in, and it kept going down," said McCarver, an investment representative. "You think, `Am I doing the right thing?' I started getting a little nervous."

But McCarver and his wife, Ginger, stuck with the plan after realizing that Morgan wouldn't be heading to college for at least another decade.

According to a recent report by the College Board, the price of tuition and fees at a four-year public college averaged $4,694 in 2003 - up more than 14 percent from the year before.

The price of a two-year public institution rose nearly 14 percent to $1,905.

While the cost of tuition and fees at a four-year private college rose just 6 percent, the price tag averaged $19,710.

That's not counting room and board. The College Board said the average total cost at a four-year public institution was $10,636 in 2003. And private tuition, fees, room and board averaged $26,854.

"Those who oversee America's colleges and universities believe their institutional importance to economic recovery is undeniable, and they are, in large measure, correct," College Board President Gaston Caperton said.

"Still, all of us need to focus on the mounting and troubling hardships of financing an education."

Parents of college students certainly realize how expensive an education has become, but those whose children are younger may be in for sticker shock.

The College Board estimates it could cost as much as $72,000 to send your 8-year-old son or daughter to a four-year, public school 10 years from now.

No matter how old your children are, experts suggest you begin preparing for their educations.

  • Start early

    Thanks to the "magical powers" of compound interest, savings will grow the quickest the earlier you invest.

    If you invest $10,000 this year at 10 percent, you will gain $1,000 in interest and have $11,000 next year. That same pool of money, growing at an additional 10 percent next year, will then grow to $12,100.

    "There is a compounding effect that we try to hammer home to people," said Joe Romano, certified financial planner and president of Romano Brothers & Co. in Evanston, Ill.

    Romano said people who don't understand how rapidly saved money can grow often put off starting their savings.

    "They say, `Why don't I wait until they're 5 or 10 years old and then I'll give twice as much,' " Romano said. "But because of the compounding interest, if they have a guaranteed rate of return, they'll have to give four or five times as much if they procrastinate."

    Traditional wisdom said to invest in old-fashioned savings accounts and savings bonds. But several new possibilities have sprouted in the past decade.

    Many states offer prepaid tuition plans that allow you to pay for your children's education at state schools while they are still infants.

    Section 529 plans are now available in every state, allowing you to invest tax-free dollars in a state-managed plan that grows tax-free.

    And Coverdell Education Savings Accounts allow most people to contribute tax-free dollars into an investment plan that you manage yourself. It also grows tax-free.

    However, there are income requirements and contribution limits, as well as different degrees of risk, associated with each plan.

    While the greatest benefit of college savings plans come to those who start early, there are also options for parents whose children are already in high school and are only a few years away from college.

    There are millions of dollars in scholarships, loans and work-study programs available to families who do not have enough money to pay for college immediately.

    There are more than 2,300 sources of college funding in a database

    run by the College Board, totaling nearly $3 billion in available aid every year.

  • Scholarships

    Scholarships get a large amount of attention from students and their parents, with the lure of free money.

    Some of the best chances of getting scholarships are through local organizations. The smaller the geographic area a scholarship covers, of course, the more likely you are to win one of them. School guidance counselors should be able to help locate possible scholarship

    opportunities available in the city, county, state, and region where you

    live.

    This also includes small membership organizations. Maybe your employer offers college scholarships to children of employees. Maybe your church, community service organization, union or other organizations could be a source of information and possibilities.

    Most scholarships only cover a very small fraction of a college education, as little as $100.

  • Financial aid

    Financial aid is meant to cover the difference between what your family can afford to pay and what college costs.

    More than half of the students currently enrolled in college, according to the College Board, receive some sort of financial aid to help pay college costs.

    The financial aid system is based on equal access, with students and their families expected to pay for college to the extent they are able.

    The amount you should be able to contribute is known as the Expected Family Contribution, or EFC. Even with financial aid, families are expected to use income, savings and other loans.

    Most financial aid comes through loans that must be repaid. They are low-interest loans sponsored by the federal government and based on financial need. These loans are subsidized so they do not accrue interest until you begin repaying them after graduation.

    Student employment and work-study aid also helps students pay for costs. Work-study is a federal program that provides students with part-time work to give them money and experience.

    To receive loans or work-study, you will fill out the Free Application for Federal Student Aid, or FAFSA. It is available by calling (800) 433-3243. You can reduce processing time by filling it out on the Web at www.fafsa.ed.gov.

    To complete an online FAFSA, you will need a U.S. Department of Education PIN that is available at www.pin.ed.gov. It will take up to 10 days to receive it in the mail.

    You are eligible to file the FAFSA as of Jan. 1, so you will want to do so as soon as you can. You will want to know when your school or state deadlines are, and you will need to see what other financial aid forms are needed.

  • Make the investment

    While the cost of a college education continues to grow and may seem like a waste of money to some, experts say the money is still a good investment.

    Annual earnings for year-round, full-time workers with bachelor's degrees are about 60 percent higher than for those with only a high school diploma, according to the College Board.

    And over a lifetime, that difference could amount to $1 million.

    "In the United States, college is clearly an investment in the future that pays off over a lifetime in both monetary and nonmonetary terms," Caperton said.

    "What all of us need to remember, and tell others, is that America's future and quality of life are tied to the benefits of higher learning, to what transpires in the lecture halls and labs across the country."

    Chris Winston writes for the Herald-Journal in Spartanburg, S.C.

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