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Financing Your Child's Education

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As a parent of a young child, thoughts about them going off to college and how they will pay for it have probably crossed your mind. At the same time you’ve probably also thought that since they may have many years yet before college that it can be something to put off until later. Unfortunately, this couldn't be further from the truth. Especially since even a modest undergraduate degree could end up costing over $100,000.

Estimate How Much You’ll Need

Taking the first step in saving for college is always the hardest. You’ll be asking yourself how much you should save and where you should put the money. Once those questions have been answered it becomes much easier to start making those deposits.

First, you need to estimate how much that education will cost. To give you an idea, for the 2009-2010 school year, the average annual price for tuition, room, and board at public universities was over $12,000. At private universities this number jumped to over $32,000. So, a four year degree today will cost anywhere from around $50,000 to well over $100,000.

Keep in mind that these are today’s prices. If you have a newborn on your hands, that means you’ve got 18 years before college, and the cost then will be significantly higher. To give you an idea, 18 years ago tuition prices were roughly half of what they are today. That means if the cost of tuition continues to increase as it has in the recent past, you can expect to spend around double today’s numbers. Knowing that, a public university four year degree may ultimately cost over $100,000 by the time your child is ready to attend college.

Think About Financial Aid

The good news about higher education is there are programs out there to help with some costs. Financial aid comes in the form of scholarships, loans, and grants. So as a parent, you aren’t necessarily expected to foot the entire bill. While you may want to be able to provide for your child’s entire education, they aren’t completely out of luck if that isn’t possible.

So, keep financial aid in mind when planning for how much you’ll need to save. Granted, you shouldn’t be counting on a full scholarship and put off saving completely, but there will be some opportunities available when it’s time for your child to addend school.

Coming Up With the Money

The hardest part is coming up with the money and putting it to work in the right place. Obviously, the easiest thing to do is to simply take some money out of every paycheck and put it into a savings account. While that’s a good start, due to low interest rates you’ll never be able to achieve your goal.

So, you’ll need to look at better methods for saving and investing that money. Probably the most common vehicle for college savings is the 529 plan. These plans have many advantages from tax deductions on contributions, tax-deferred growth, and tax-free withdrawals for qualified expenses. If the tax breaks aren’t good enough, these plans also provide a variety of investment choices to choose from that will allow you to earn more than the fraction of a percent you receive in a typical savings account.

Each state administers their own 529 plan so there isn’t a universal account out there for everyone. The best thing to do would be to start by looking at your state’s plan and examine the benefits. There are situations where another state may offer a better plan and it may be worthwhile to use it instead.

Once you’ve found a plan you’ll want to look at your investment options. Most have portfolios already created that cover everything from the most conservative to the most aggressive investment styles. Again, this will be up to you to choose and you should only invest with what you’re comfortable with. But even the most conservative options will likely generate a modest return compared to the bank or CDs.

To give you an idea of how a little bit goes a long way in a 529, consider this. If you have a child age one or under and begin contributing just $200 a month into a conservative portfolio that generates an average of 5 percent returns a year, by the time your child is ready to begin college you’d have $70,000 saved up! Sure, it still might not be enough to foot the entire bill, but it will make a tremendous dent and keep your child from resorting to going into substantial debt by taking out student loans. A little bit goes a long way when you start early.

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