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 THE BIG PAYOFF:
FINANCING COLLEGE
The time to plan
and
save is now
By MARY ANNE COLE
“Whatever you do or dream
you can, begin it.
Boldness has genius, power
and magic in it.
Begin it now.”
—Goethe
The signs of back-to-school
aren’t hard to miss: the squeal
of a school bus’ brakes, back-to-school sales, school zone
speed limit signs flashing, autumn in the
air. Whether your child is 6 months old or
16 years old, it’s never too late — or too
early — to begin planning for college.
Some people put off investing for
college because they don’t know how
to estimate what the cost will be 10 or
15 years down the road. A financial
planner can help you make a detailed
plan, but you can make a reasonable
estimate based on the kind of school to
which you envision sending your child,
where you plan to get the money and
how many years you have until you
pack the kid and the laptop into the
family car and head off to campus.
As with all investing, it’s better to get
started today with a ballpark estimate
than to put it off until you get around to
consulting a pro. It’s always a good idea
to consult a professional as soon as possible,
but don’t let that stop you from at
least getting started.
THE BIG PAYOFF
Few would argue the value of a college
education in the United States
today. According to a report from the
U.S. Commerce Department based on
the 2000 census, the competition is getting
tougher: In 1975, only 14 percent of
all adults over age 25 had a college
degree, but by 2000, 26 percent of
adults over age 25 had a college degree,
and 60 percent of high school graduates
that year were going on to college the
following year. Full-time, year-round
workers with a bachelor’s degree earned
1.8 times what a high-school graduate
earned, up from 1.5 times in 1975. And
those with an advanced degree brought
home 2.6 times what those with only a
high school diploma earned.
College also provides networking
opportunities, friendships and the means
to intellectual depth and capacity that
can lead to a fuller life.
SETTING THE GOAL
Most colleges and universities have
Web sites that provide an estimate of
current annual costs. Whether you’re
willing to finance a state university or
Harvard, find the current cost of the kind
of school you’re aiming for. Remember,
we’re not talking just tuition here, but
also books, fees (like lab fees and activity
fees), housing, food, equipment (computers,
printers, telephone), spending
money, transportation and health insurance.
Keep your figures in today’s dollars.
Once you have a bottom line for
sending your child off to college today,
multiply that amount by 1.06-1.1 for
each year you have until the big day to
determine the approximate costs for year
1 of college (using 1.06 for a low estimate
and 1.1 for a high estimate). Then
continue multiplying for the sophomore,
junior and senior years. Keep right on
multiplying if you want to include grad
school in your plans.
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ANNUAL COLLEGE EXPENSES IN
TODAY’S DOLLARS: $25,000
YEARS UNTIL COLLEGE: 7
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LOW ESTIMATE
$25,000 x 1.06 = $26,500
$26,500 x 1.06 = $28,090
$28,090 x 1.06 = $29,775
$29,775 x 1.06 = $31,562
$31,562 x 1.06 = $33,456
$33,456 x 1.06 = $35,463
$35,463 x 1.06 = $37,591
Year 1 expense
$37,591 x 1.06 = $39,846
Year 2 expense
$39,846 x 1.06 = $42,237
Year 3 expense
$42,237 x 1.06 = $44,711
Year 4 expense |
HIGH ESTIMATE
$25,000 x 1.1 = $27,500
$27,500 x 1.1 = $30,250
$30,250 x 1.1 = $33,275
$33,275 x 1.1 = $36,602
$36,602 x 1.1 = $40,263
$40,263 x 1.1 = $44,289
$44,289 x 1.1 = $48,718
$48,718 x 1.1 = $53,898
$53,898 x 1.1 = $58,949
$58,949 x 1.1 = $64,844 |
AVERAGE ANNUAL EARNINGS OF
FULL-TIME WORKERS AGE 25-64 |
Educational level
Professional degree
(MD, JD, DDS, DVM)
Doctoral degree
Master’s degree
Bachelor’s degree
High school diploma |
Average Annual Earnings
$109,600
$89,400
$62,300
$52,200
$30,400 |
Source: U.S. Census Bureau, Current Population Surveys, March 1998, 1999, 2000
www.census.gov/prod/2002pubs/p23-210.pdf |
AVERAGE LIFETIME EARNINGS OF
FULL-TIME WORKERS AGE 25-64 |
Educational level
Professional degree
(MD, JD, DDS, DVM)
Doctoral degree
Master’s degree
Bachelor’s degree
High school diploma |
Average Annual Earnings
$4.4 million
$3.4 million
$2.5 million
$2.1 million
$1.2 million |
Source: U.S. Census Bureau, Current Population Surveys, March 1998, 1999, 2000
www.census.gov/prod/2002pubs/p23-210.pdf |
So now you have a target. Knowing
what you’re shooting at is half the battle.
MEETING THE TARGET
There are many, many ways to finance
college, and squirreling away every dime
you earn from now until move-out day is
only one. Divide your target into percentages
of the target that will be met by investing;
by your child’s contribution from working
both before and during school; contributions
from others (like grandparents);
grants, scholarships and military assistance;
and loans. Start planning now for how to
meet each of those percentages.
Remember, we’re still talking ballpark
planning here, so add up the cost for the
four years of college and divvy it out
according to the percentages you think
are reasonable. In the example we began
above, the total cost would range from
about $165,000 to about $226,000.
Let’s say you plan to pay half, with half
coming from other sources, such as in
the list shown below:
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SOURCE
Your contribution
Child’s contribution
Others’ contributions
Grants and scholarships
Loans |
PERCENTAGE
50
10
20
5
15 |
GOAL
$82,500 – $113,000
$16,500 – $22,600
$33,000 – $45,200
$8,250 – $11,300
$24,750 – $33,900 |
YOUR CONTRIBUTION
There are as many ways to invest as
there are investors. Earnings from 529
College Savings Plans are tax-exempt, and
the funds from these plans can be used for
all college expenses, not just tuition. In
addition,the money in a 529 plan generally
has little effect on your ability to qualify
for financial aid, scholarships and grants.
Education IRAs, now called Coverdell
Education Savings Accounts, allow you to
contribute up to $2,000 per year per student,
and earnings are tax-exempt.
However, if your income is too high, you
may not qualify for this option.
Custodial Accounts, also called
UTMA/UGMA accounts, are irrevocable
gifts to a child that can be used for any
purpose when the child reaches 18 or
21. Prepaid tuition plans are ways to purchase “units of tuition” at state colleges
and universities at current costs for
future use. This option is available only
for tuition, not for other expenses.
You can also fund your contribution
through any number of investment
types, from low-risk, low-return money
market funds to lottery tickets, but keep
in mind that your investment will have to
be liquid when you need it (which pretty
much eliminates the lottery-ticket option)
and that investment fees and taxes on
your earnings can take a bite out of your
plan, so aim high.
Since we’re just ballparking to get
started, divide your final goal figure by
the number of years you have to go plus
.1 for each year you have before your
child goes to school. Using the example
above, then, you’d divide $82,500 by 7.7
and $113,000 by 7.7 to get a range of
$10,714 - $14,675 for a ballpark annual
goal. Your returns will vary widely based
on the return rate of your investment
and how often you contribute; one lump
sum invested at the end of each year will
earn less than 1/12th of the goal amount
invested each month, which will earn less
than 1/52nd of the goal amount each
week, which will earn less than one lump
sum at the beginning of the year.
It’s also a good idea to take out life
and disability insurance to protect your
plan in case you’re not able to work or
are completely out of the picture.
YOUR CHILD’S CONTRIBUTION
Many parents want their children to
chip in for the cost of their education so
they’ll value it more and begin to build a
résumé. Setting aside a percentage of
money gifts for birthdays and other holidays
is a good way to get started, as is
setting aside a small part of weekly
allowances or money paid for chores at
home, baby-sitting, lawn-mowing and
the like. Once your child reaches working
age, some of the money made from
summer jobs can go a long way toward
meeting that goal. And once in college, a
part-time job can fill in the rest.
OTHERS’ CONTRIBUTIONS
Doting grandparents are often eager
to help out, and they can set up
Custodial Accounts, also called
UTMA/UGMA accounts, if they don’t
mind the fact that the account goes to
the child at age 18 or 21 with no strings
attached. Parents can also talk to grandparents
about making part of their annual
birthday or other holiday gifts a contribution
to a college fund. Older relatives
can also manage their estates with gifts
of up to $12,000 annually without tax
consequences, although advice from an
estate planner is always a good idea
before making these kinds of gifts.
GRANTS, SCHOLARSHIPS AND LOANS
As you get closer to the first year of college,
you can begin working on other kinds
of financing, including grants, scholarships
and loans. The landscape for grants and
financial aid changes frequently, and the
best-laid plans may not work out if your
income or your ability to contribute to educational
costs is too high. You won’t know
if you qualify for financial aid from the U.S.
Department of Education’s federal Student
Aid (FAFSA) program until you fill out the
application the year your child graduates
from high school. Pell Grants from the
Federal government, Federal Supplemental
Educational Opportunity Grants (FSEOG),
and some grants from state and local governments
are available for students with
financial needs.
However, if you’ve planned well, you
may not qualify for any of these.
Scholarships, on the other hand, are frequently
awarded without taking financial
need into account, and some are based on
planned areas of study or parental associations
(workplace, clubs), rather than academic
achievement. Long, long lists of scholarship
opportunities are available on the
Internet, but prepare your child to spend a
good deal of time filling out applications.
Military assistance is also an option for
many students interested in the armed
forces. The GI Bill, ROTC and military academies
(for the chosen few) offer financial
aid in exchange for military service.
Federally sponsored loans generally have
better terms than do private lenders, which
can have hidden fees, high interest rates and
other traps your student may find difficult to
maneuver after graduation. However, many
students find it difficult to start their adult
lives and careers already saddled with debt,
even at attractive interest rates.
WHEN TO START?
The suggestions in this article can
help you estimate what you’ll need so
you can get started on one of the most
important investments you’ll make in
your lifetime — your child’s future.
However, these suggestions should not
take the place of advice from a financial
professional, so get started with your
plans now, but make an appointment
with a financial professional as soon as
possible to review your specific situation.
Getting started isn’t hard, but the
sooner you start, the better off you and
your child will be. Goethe said it best:
Begin it now. |
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