Hahaha, I'm going to cost daddy $200,000 when it's time for college.
Author Bio:
The Money for College Project was started with one goal in mind: to help people find better ways to pay for college. MfCP is published by DJ, who works in student financial services at a large (19,000+) research university. At MfCP you can find easy to understand explanations of financial aid awards, creative ways to make money for college students and working adults, and college savings strategies.
Pregnancy is Not Too Early to Start Saving for College
We all know that paying for college is expensive. In fact, outside of your home, if you make the decision to fund your children’s college tuition it will likely be the second largest expense you ever have.
Saving for your child’s future education is a lot like saving for retirement. You don’t know exactly how much their education will cost, so you calculate a rough estimate, and make a plan to reach that goal by the time they enter college.
Sounds easy right?
Wrong.
There are a million factors that could wildly fluctuate the cost of a college education. Public vs. private. In-state vs. out-of-state. Academic whiz vs. entrepreneurial independent. Socialite vs. introvert.
The good news however, is that there are concrete ways that you can begin early, harness the power of compound interest and a large time horizon, and secure a bright future for your child.
Nobody can predict the future; we can however, prepare for it.
529 College Savings Plans
There are two types of 529 college savings plans that parents can take advantage of. The College Savings Plan, and a Pre-Paid Tuition Plan.
The College Savings Plan allows parents to contribute money into a mutual fund which grows based on the fluctuations in the market. These plans are typically age based allocations, which means that they will become more conservative investments as the child gets closer to entering college, much like a target date retirement fund.
The College Savings Plan can be withdrawn to help cover eligible college expenses. This would include tuition and fees, room and board, books and supplies, transportation, and other college related personal expenses (including a laptop).
The College Savings Plan is an excellent choice if you do not know which college, or which state, your child will attend college in. It is very flexible, and it can generally be used to cover any expenses that a student has pertaining to their education. You also have the benefit of compound interest and potentially a large time horizon on your side. There are also tax benefits to investing in a 529 plan, which differ from state to state.
The Pre-Paid Tuition Plan allows you to purchase tuition credits at the current rate, to be used for tuition in the future. Some Pre-Paid Plans are offered directly from one school, to be used at only that one school, while others are administered by a state, and can be used for any school within that state.
The performance of your tuition credits is based on inflation. For example, if you buy 15 credits (typically one credit = one credit hour) in 2011, and tuition inflates 64% by 2029 when your child enters college, then the difference in the two prices of the credits will be your performance growth.
With a Pre-Paid Tuition Plan you will only receive the credits you pay for, and you must pay in full upon purchase. A typical college undergraduate education is between 120 and 150 credit hours. This is the amount of credits you should plan to buy to cover an entire education.
Only 11 states offer a Pre-Paid Tuition Plan, so it is important to check with your state treasurer to see if this option is available where you live.
Financial Aid
As a parent, you should encourage your child to find ways to pay for college themselves. Even if you are blessed enough to be able to cover the entire cost of tuition, it is still very beneficial for a student to take an active role in their education financing so they understand how the process works, and the extreme benefit they are receiving through their education.
The best way for a parent and a student to participate in finding money for college is through financial aid.
There are many different sources of financial aid, and some are much more preferable than others.
Federal Financial Aid
The first step to applying for all sources of federal financial aid is to submit the Free Application for Federal Student Aid (FAFSA). This is your one stop shop for all federal financial aid.
Pell Grant: This is the largest federal grant, and it is based on financial need as determined by the FAFSA. Currently, the annual maximum is $5550.
FSEOG: This is a supplemental grant that is also based on financial need. The annual maximum is determined by the school, but it can be anywhere between $100 and $4000 per year.
Work-Study: This is basically a part-time job that you are placed in by the financial aid office. Typically this will be a flexible position, based somewhere on your campus. You will earn a paycheck based on your hours worked, and your rate of pay. It is important to note, that this award cannot be used to directly credit your college tuition, since you have to earn your salary based on your hours worked.
Stafford Student Loans: If all other sources of financial aid have failed, you can revert to taking out student loans. You may qualify for a subsidized Stafford Loan which currently has a 3.4% interest rate. You may also qualify for an unsubsidized Stafford Loan which carries a 6.8% interest rate. The payments on both of these loans are deferred until after your graduate.
Other Financial Aid
School Supported Scholarships: Your school will likely be able to offer numerous scholarships ranging from a few hundred dollars, to the entire cost of your tuition. You may receive a scholarship for academics, athletics, ROTC, entrepreneurial spirit, creativity, acting ability, artistic ability, or even a unique family heritage.
State Sponsored Scholarships: Many states offer scholarship programs that are funded by their lottery programs. In many states, these programs offer millions of dollars per year to eligible students.
Private Scholarships: These are the most numerous of any scholarship categories. You can search for these scholarships everywhere from your local Ruritan Club, to large corporations like Target, Wal-Mart, and GE. The company you work for may also sponsor scholarships for children of their employees. Your high school guidance counselor and local library are generally the best places to look for local private scholarships.
The Bottom Line
There are literally a million ways to pay for a college education. The list above gives you just a small taste of all the opportunities that exist in financial aid, and college savings plans.
The more time you are willing to put in, and the earlier you are willing to start, the easier you will find it to stomach paying the rising costs of college education.
You cannot control the costs. However in the end, if you prepare well enough, you will be able to give your child every opportunity that they will need to be successful and unlock their potential through a college education.
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