If you think you or your kids would benefit from a college degree, the time to start saving is the moment you start considering it. College costs are rising—up 4.4 percent from 2008, to $26,273 in tuition for the 2009-2010 school year, so it’s smart to start saving as soon as you can. Room and board, books and food costs will be additional to that figure. The four-year total is in the range of $105,100 to $171,000 depending upon whether the institution is public or private. Public schools receive part of their funding from government aid, so their costs are lower.
Don’t be daunted by the amount you’ll have to save. If you save $200 monthly at an 8 percent annual rate of return for your newborn, you’ll have more than $96,000 by the time your child is 18. Here’s a calculator from FINRA to help you plan.
Be strategic about how you save—parental savings can impact how much financial aid the child will qualify for. In most cases, it’s preferable to save into a parentally owned custodial account, or a 529 account.
Once you determine how much to save, you need to decide what savings vehicle to use. There are several ways to do that, including several new tax-advantaged options. You can compare those here.
States and colleges all have their own rules for financial aid. Some states give more favorable treatment to prepaid tuition plans and other college savings options.
To help understand financial aid, the U.S. Department of Education (ED) has launched Student Aid on the Web, which is filled with details on federal aid programs, including grants, work-study, and loans. The ED also has streamlined the process of applying for aid, so you as a parent—and your child, when they’re old enough—can submit a free application online and monitor its results. You also can estimate in advance how much the student will qualify for and how much the family will be expected to pay.
Know the cost of borrowing for college. You can borrow from either governmental or private institutions. While federal loans have strict eligibility requirements, they offer many advantages over private loans:
In contrast to federal loans, private institutions usually charge variable-rate interest at higher amounts, and repayment tends to come with stricter terms. So, for example, you wouldn’t be able to defer payment on a private loan if you decide to go to graduate school.
As a general rule, parents and students alike should research and exhaust federal loan options before turning to private lenders. Ultimately, you’ll need to fill out a Free Application for Federal Student Aid to apply to the government.
The Government's stance on your higher education: smart, skilled Americans lead to a better country. Uncle Sam wants to lend you money for college.
Governmental loans and grants are easy to apply for, and you should apply for those before private lenders like banks.
To help you understand the differences among these college savings options, use the College Savings Plan Comparison Chart.
For additional help and information, see our Tips for Choosing College Savings Options.