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How Aggressive Should
College Savings Plan Be?
This question heavily hinges on four things: 1) the amount of time you have before child begins college and 2) the amount of risk you are willing to incur. The more time you have, the more aggressive you can afford to be. If the stock market dips, as it certainly will, you will have time to wait for it to rise. As your child grows closer to college, you should shift a portion of your investments into safer instruments like low-risk mutual funds, Certificates of Deposit, T-bills and bonds. That way, you'll keep earning interest without incurring an undue amount of risk and potential loss. Families need to also take into consideration the cost of education and their other financial goals and responsibilities.
FAQ – Saving for College
Q - Will saving for college limit the amount of financial aid my child receives?
A - Yes. Part of the formula used to determine financial aid awards from the federal government is your income and assets. Regardless of savings, most families qualify for financial aid if they still have the need for it. Also, many scholarships are awarded without regard to financial need. Look to combine financial aid with your own savings you and your children will be better off in the long run.
Q – What are state prepaid tuition plans?
A - Prepaid tuition plans, also called Tuition Account Programs or TAPs, are offered by a number of states and allow families to pay for tomorrow's college education at today's prices. Each plan varies, but generally speaking, all allow you, your friends and family members to purchase credits toward tuition at today's prices regardless of when your child goes to college. There are drawbacks. Plans may require the savings be used at certain schools, generally public ones in your state. The policies used to cash these plans in for use at other institutions vary. You should check out the particulars of a plan before you commit. Also, TAPs invest very conservatively. You could most likely save the same or a greater amount of money in other instruments while only incurring a slightly higher level of risk and not limit where your child goes to school.
Q - What does it mean to diversify my investments?
A – Simply put, it means do not put all of your financial eggs in one basket. Diversifying investments refers to the practice of spreading your savings around in different savings instruments such as stocks, bonds, mutual funds, certificates of deposits (CDs) and money market accounts. By doing this, you add a level of security to your college savings through diversity. If your stocks are down, you will be able to draw money from a money market account, CDs or savings bonds until the stocks rise again.
Q – With more than one child to save for, how should my investment strategy change?
A – It makes no difference. You will have to save more each month or each year, but where you invest your money, how you diversity it and what you hope to save per child should remain constant. What is key here is to take a careful look at your budget, particularly the family’s spending and make saving for college one of your priority goals. You cannot control or predict interest rates but you can commit to saving. Remember saving is rewarded best when it is done early and often.
Q - With over $65 Billion in financial aid, do families really need to save for college?
A - YES. Though it is true that financial aid is available for most students, increased college enrollment and ever-growing costs make it more and more important for families to save up for post-secondary education. Few students actually receive a financial aid package that covers their entire education. Because of interest, educational loans are repaid for more than what was borrowed. By starting to save early and often, families will have more money for college than they invest. That’s the power of compounding interest.
Q - How much will I need to save for college?
A – That's almost impossible to predict with precision. However, there are a few factors that will determine your college costs. First is when your child will begin college. Tuition and fees are rising by an average of about 5 or 6 percent annually. Will your child attend a public or private school? Generally speaking, public schools are less expensive than private schools. The EAS Education Resource Center has created a Seven-Step Approach to Paying for College which will assist you in establishing a ballpark estimate of what your child's college education will cost and how you can build a plan to pay for it.
Q - How much should I save?
A - That's a tough question with no clear answer. Save what you can without overextending yourself or ignoring your own retirement and other family goals in the process. Be creative and dedicated to saving. Look at you family circumstances and see where you may be able to consolidate and save. Aim to at least save 5% of take home income. Encourage your kids, to participate by adding to the savings fund from their allowance or work. Encourage the extended family, especially grandparents to add to the college savings fund. Some families have made it a family tradition to build an ongoing family college saving fund that continues with each generation contributing. If you can manage $25 per week ($100 a month) without taking all the joy out of your life, then by all means do it. Certainly, there will have to be some spending cutbacks, but there is no need to break the bank altogether or to vanquish your recreational life while you save. As important as how much you save is how regularly you save. Make saving a habit. Treat it like a monthly bill. Pitch into a college savings account every week, month or year and let compounding interest work for you.
Q - How should I save it?
A - This is the real question and opportunity. There are numerous savings instruments available, but choosing the right one for your family’s needs and level of comfort is difficult. Where you put your money should be determined by how much time you have to save and how much risk you are willing to incur. So read up on mutual funds, custodial accounts, Education IRAs, prepaid tuition plans, trust funds, savings accounts, savings bonds, stocks, bonds and all of your other options. See the EAS Education Resource Center, Financial Planning Web Sites.
Q - Should I use a financial advisor?
A – Another tough question. This will depend on family and personal circumstances. If you have a sound knowledge of personal finance and a couple of hours to devote to your savings each month, then you might be able to handle things yourself. If this is not the case, then consider a financial advisor. Financial advisors not only lend expertise, they also provide an important impartial opinion in the savings process. Please see the EAS Education Resource Center, Choosing a Financial Planner. | |
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