Can I Afford to Send My Child to College?

It's the question every parent dreads. Although the answer hopefully is yes, you'll have to plan ahead. Unless you are very well off financially, you can't expect to sit on the sidelines for years and then suddenly find the funds to pay for college when your child is ready to go. The best thing to do is to start saving as early as possible, even if you're able to save only a small amount at first.

How much will college cost in the future?
For the 2006/2007 academic year, the average annual cost of a four-year public college is $16,357 and the average annual cost of a four-year private college is $33,301. (Source: The College Board's Trends in College Pricing Report 2006.) The total figures include five expense items: tuition and fees, room and board, books and supplies, transportation, and personal expenses.

It's a likely bet that costs will continue to rise, but by how much? Annual increases in the range of 5 to 8 percent would certainly be in keeping with historical trends. But keep in mind that the actual percentage increase in any year could be higher or lower, and the rate could vary from public to private college.

How will I pay for it?
Many parents save less than 100 percent of their child's education costs before college. Usually, they put aside enough money to make a down payment on the college bill. Then, at college time, parents can supplement this down payment by:

• Obtaining private loans (e.g., home equity loan, margin loan)
• Obtaining financial aid-related loans (e.g., PLUS loan)
• Tapping their own investments (e.g., mutual funds, 401(k) plan, IRA, cash value life insurance)
• Having their child apply for financial aid (e.g., student loans, grants, scholarships, work-study)
• Having their child contribute a portion of his or her savings and/or investments
• Having their child obtain a part-time job during college

How much should I save?
You'll want to put aside as much money as possible in your child's college fund. The more money you put aside now, the less you or your child will need to borrow later. Start by estimating your child's costs for four years of college. Then decide how much of the bill you want to fund--100 percent, 75 percent, 50 percent, and so on. To meet your goal, you'll need to use a financial calculator to determine how much to put in your college fund each month.

In many cases, the amount of money you should contribute really boils down to how much you can afford to contribute. Every situation is different. You'll need to take a detailed look at your family's finances in order to determine what you can afford to add to your child's college fund each month. To increase the amount of money that you're able to squirrel away, consider these options:

• Cut back on nonessential spending
• Reduce your standard of living (e.g., own only one car, eat out less often)
• Add unanticipated windfalls like bonuses, raises, or an inheritance to your child's college fund
• Have a previously stay-at-home spouse return to the workforce
• Obtain a new job with better pay
• Ask grandparents to contribute to your child's college fund in lieu of gifts

Start a savings program as early as possible
Perhaps the most difficult time to start a college savings program is when your child is young. New parents face many financial strains that always seem to take over--the possible loss of one income, child-related spending, the competing need to save for a house or car, or the demands of your own student loans. Yet this is the time when you should start saving.

With many years to go until your child starts college, you have time to select investments that have the potential to outpace college cost increases (but keep in mind that investments that offer higher potential returns may involve greater risk of loss). In addition, you'll benefit from compounding, which is the process of earning additional funds on the interest and/or capital gains that your investment earns along the way. With regular investments spread over many years, you may be surprised at how much you may be able to accumulate in your child's college fund.

But don't feel bad if you can't put aside hundreds of dollars every month right from the start. Start with a small amount, say $25 or $50 a month, and add to it whenever you can. You'll have a head start, as well as peace of mind knowing you're doing the best you can.

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