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Saving for College

 

It's important to start a college fund as soon as possible, because next to buying a home, a college education might be the biggest purchase you ever make.


There's no denying the benefits of a college education: the ability to compete in today's competitive job market, increased earning power, and expanded horizons. But these advantages come at a price--college is expensive. And yet, year after year, thousands of students graduate from college. So, how do they do it?

Many families finance a college education with help from student loans and other types of financial aid such as grants and work-study, private loans, current income, gifts from grandparents, and other creative cost-cutting measures. But savings are the cornerstone of any successful college financing plan.

College costs keep climbing

It's important to start a college fund as soon as possible, because next to buying a home, a college education might be the biggest purchase you ever make. According to the College Board, for the 2010/2011 school year, the average cost of one year at a four-year public college is $20,339, while the average cost for one year at a four-year private college is $40,476.

Though no one can predict exactly what college might cost in 5, 10, or 15 years, annual price increases in the range of 5 to 8% would certainly be in keeping with historical trends. The following chart can give you an idea of what future costs might be, based on the most recent cost data from the College Board and an assumed annual college inflation rate of 5%.
 

 Year 4-yr public 4-yr private
 2010/11  $20,339  $40,476
 2011/12  $21,356  $42,500
 2012/13  $22,424  $44,625
 2013/14  $23,545  $46,856
 2014/15  $24,722  $49,199
 2015/16  $25,959  $51,659
 2016/17  $27,256  $54,242
 2017/18  $28,619  $56,954
 2018/19  $30,050  $59,801
 2019/20  $31,552  $62,792
 2020/21  $33,130  $65,931

Tip: Even though college costs are high, don't worry about saving 100% of the total costs. Many families save only a portion of the projected costs--a good rule of thumb is 50%--and then use this as a "down payment" on the college tab, similar to the down payment on a home.

Focus on your savings

The more you save now, the better off you'll likely be later. A good plan is to start with whatever amount you can afford, and add to it over the years with raises, bonuses, tax refunds, unexpected windfalls, and the like. If you invest regularly over time, you may be surprised at how much you can accumulate in your child's college fund.

 Monthly Investment  5 years  10 years  15 years
 $100 $6,977  $16,388  $29,082
 $300  $20,931  $49,164  $87,246
 $500 $34,885  $81,940 $145,409

Table assumes an average after-tax return of 6%. This is a hypothetical example and is not intended to reflect the actual performance of any investment. 

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