How to Save for Your Child’s College

You better sit down for this.  As you probably already know college is expensive. And getting more and more expensive every year.

The need for parents like you to consistently save for future college costs has never been more critical. To help you with this monumental task, here is a quick little 5-step guide on how to save for your children’s college education…that works.

Step #1: Determine how much you’re going to owe.

This is important for a couple reasons. But the main one is that you should have a savings goal to shoot for.  You wouldn’t start a car trip without a destination in mind right?  The same goes for college savings plan.

The best way to estimate how much college is going to cost is to use a college cost projector calculator.  There is a great one available to you for free here:
http://www.finaid.org/calculators/costprojector.phtml

A couple tips when using this calculator:

  1. Assume 7% for college inflation.  (This has been the average over the last 15+ years and we don’t see it changing anytime soon unfortunately.)
  2. Click “yes” for the “adjust tuition after matriculation”

Step #2:  Determine how much you can comfortably set aside each month.

This step might require you to do a family budget. If you’ve never done a detailed family budget, now is a good time to start. Because, the last thing you want to have happen is to start a college savings plan and then one month later stop it because you didn’t budget properly.

Here is a link to a good budget sheet you can use: http://financialplan.about.com/library/n_budget.htm

Once you have your budget all lined it should be pretty clear how much you have available to set aside each month for college.   Whether it’s $200 per month or $1,000 per month, nail down one amount that will come out of your savings or checking account each and every month.

Step #3:  Compare available college savings plans.

Now that you know how much you need and how much you’re going to save on a consistent basis, it’s time to make a decision on where you want to put it.

This is where we see so many families make the make the decision to follow conventional wisdom and save into 529 college savings plans.

529 plans are the smart thing to do right?

Wall Street, the government, your friends, Suze Orman, and the media say they are.

Shouldn’t you trust their advice?

Not so fast.  Before you rush off and make a selection, make sure you have all the facts.

Here is a quick run down of 5 of the most popular options available today, with both the pros and cons of each…

Option #5: 529 plans

Pros:  Tax deferred growth and tax-free qualified withdrawals for college.  Some plans now offering CD’s as an investment option with guaranteed interest rates.

Cons:  Stock market risk with zero guarantee of principal for most plans. Still included in financial aid formula in most situations. Not liquid – penalties for making non-qualified withdrawals.

Option #4:  Money market and bank savings accounts. (I have lumped these two together since they have virtually all the same features).

Pros:  It is FDIC insured up to $250,000.  Typically has a minimum guaranteed interest rate. There are no penalties for withdrawing for college or any other reason.

Cons:  The interest is usually very low.  Also, with the problems in the current banking industry and banks going out of business, FDIC insurance could be slow to provide any guarantees up to $250,000. It is counted in the financial aid formula.

Option #3:  Treasury Bills.

Pros:  Considered by many the safest place to park money in the world

Cons:  Very low current returns.  Penalties for pulling out before maturity. Counted in the financial aid formula.

Option #2: Bonds including Tax-Free Muni’s and Bond Funds

Pros:  Guaranteed interest rate. Can be tax-free.  Low to medium risk.

Cons:  No guarantee on the principal.  Can be taxed.  Included in financial aid formula. Could be penalties for pulling out before maturity.

Option #1:  Cash Value Life Insurance.

Pros:  State guarantees on the principal. Consistent returns. Zero to limited penalties on withdrawals for college.  Not included in the financial aid formulas. Tax deferred and potentially tax free growth and withdrawals.

Cons:  Could be penalties for making withdrawls before 59 ½ years of age.

Until next time,

Scott Weingold
Publisher, CollegeMadeSimple.com

P.S.  Follow this link to read Part 2 of How To Save for Your Child’s College

Related Articles:
The College Savings Survival Guide
The College Savings Survival Guide, Part 2

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Editor's Note: Scott Weingold has been ranked the #1 “College Financial Aid Expert Worth Knowing About” in the entire country by CollegeStats.org.  He has co-authored the book, “The Real Secret To Paying For College. The Insider’s Guide To Sending Your Child To College – Without Spending Your Life’s Savings.” Scott also publishes a popular free online newsletter, “College Funding Made Simple" which reveals insider’s tips, methods, and strategies for beating the high cost of college.

Scott is the co-founder and a principal of the widely renown College Planning Network, LLC – the nation’s largest and most reputable college admissions and financial aid planning firm. CPN is a proud member of the Better Business Bureau, the National Association of College Funding Advisors, the National Association for College Admission Counseling, the National Association of Student Financial Aid Administrators and the Student Affairs Administrators in Higher Education.

Scott, along with his college funding advisory team, helps thousands of families throughout the country with their college planning needs and offers a series of free educational webinars and workshops on “How To Pay For College Without Going Broke In The Process!” He's been featured or mentioned in The Philadelphia Inquirer, Yahoo News, TheStreet.com, Voice America with Ron Adams, Crains Cleveland Business, and on Cleveland Connection with James McIntyre.  Scott has published numerous articles and is a professional speaker who has addressed thousands of audiences online and offline throughout the United States.  His actionable insights and candid, open approach have earned him & his team numerous media interviews, citations, and speaking opportunities, and his free online video workshop is one of the Internet’s most widely viewed pieces in the college funding space.