|
|
Paying for College:
» It Pays to Save
It's Not Too Late To Start
Saving any amount of money can make a big difference in what you can afford to pay for college. The earlier you start the better, but don't pass altogether because you think it's too little or too late.
Harness the power of interest
For every dollar you save, you earn money through interest. The longer you save, the more money you earn. For example:
- A family that saves $50 per month from the time their daughter is born will amass more than $16,000 in savings by her high school graduation. Almost $6,000 of this is interest earnings.
- If the same family starts saving when their daughter is seven years old, they would need to save about $100 per month to save the same amount.
The more you save, the less you'll need to borrow
Remember, college is a long-term investment. Like other investments, such as buying a home, most families pay for college through a combination of savings, current income, and borrowing. This means that the more you save, the less you'll need to borrow, and the less you'll need to take from current income.
Will saving hurt my financial aid chances?
Despite what you may have heard to the contrary, saving pays, even when it comes to receiving financial aid. The amount you'll be asked to pay for college is based on your family's income and assets. Savings are considered an asset. However, the financial aid formulas only "tax" about five percent of your assets each year. That is, the formulas assume that five percent of your savings are available each year to help pay for college.
For example
If a family has saved $20,000, they'll be asked to contribute about $1,000 of this savings per year to college expenses. Say their expected family contribution is $10,000. That means that while only $1,000 of their assets is being "taxed," the family can, at their option, use a greater part of their savings to meet educational expenses and reduce their need to borrow.
A family with the same income and significantly less in assets might only be expected to contribute a total of $9,000, but they'd have to rely on loans to make up the difference. The family with the greater savings is in a much better financial situation and may find they have more options in making educational choices.
Your Saving Options
Time Is Money
There are lots of ready-made savings vehicles that make saving for college easy. Here are some of the most popular choices:
Education IRA
Families can put up to $500 per year in an Education IRA, and use the money -- tax-free -- to pay for higher education expenses.
Let's say your family started when you were born, puts in $500 per year, and earns five percent interest. You'll have earned about $13,500 by the time you graduate from high school.
Roth IRA
You may withdraw your contributions to a Roth IRA to pay for college expenses without having to pay either income tax or the ten percent early withdrawal penalty.
Any investment earnings in your Roth IRA are also available for withdrawal without the ten percent penalty, but subject to regular income tax. You may withdraw investment earnings tax-free if you're over 59 1/2 and you've had your Roth IRA for at least five years.
State college saving programs
These programs allow you to save money for college through state-sponsored investment accounts.
- You can use the funds at any college or university, in any state.
- The fund usually guarantees a minimum rate of return.
- Funds are tax-deferred until you enter college and are then taxed at a student's tax rate.
State prepaid tuition programs
These programs allow you to lock into the tuition price being charged at the state's public universities in the year when you're enrolled in the program.
- The tuition lock-in only applies if you attend one of the eligible in-state public universities.
- Most programs do allow the accumulated funds to be transferred to private and out-of-state schools, but then require you to pay the difference between the prepaid tuition price and the current price of tuition at the private or out-of-state school.
Savings Chart
The benefits of saving early
How much would you and your family need to save to have $10,000 available when you start college?
| Start at when you're | Years | Monthly savings | Principal | Interest | Total |
|---|
| (Assuming a 4 percent interest rate) |
| Newborn | 18 | $32 | $6,912 | $3,187 | $10,099 |
| Age 4 | 14 | $45 | $7,560 | $2,552 | $10,112 |
| Age 8 | 10 | $68 | $8,160 | $1,853 | $10,013 |
| Age 12 | 6 | $124 | $8,928 | $1,144 | $10,072 |
| Age 16 | 2 | $401 | $9,624 | $378 | $10,002 |
| (Assuming an 8 percent interest rate) |
| Newborn | 18 | $21 | $4,536 | $5,546 | $10,082 |
| Age 4 | 14 | $33 | $5,544 | $4,621 |
$10,165 |
| Age 8 | 10 | $55 | $6,660 | $3,462 | $10,062 |
| Age 12 | 6 | $109 | $7,848 | $2,183 | $10,031 |
| Age 16 | 2 | $386 | $9,264 | $746 |
$10,010 |
It's Pretty Clear
Saving money is the best way to prepare for meeting the costs of college. The earlier you and your family begin saving, the smaller the amount you'll have to set aside each month. That said, it's never too late to start setting aside money and to plan a strategic approach to your college financing.
SOURCE: U.S. Department of Education
Twenty Things You Need To Know About Paying For College
To Get The Right Answers, Ask The Right Questions
Part of making smart decisions about college, especially about how to pay for college, is asking questions. Below you'll find our list of recommended questions to ask and consider as you go about searching for, applying to, and deciding on colleges.
Searching and applying
- What's the average total cost (including tuition and fees, books and supplies, room and board, transportation, and other personal expenses) for the first year?
- What are the ranges of room costs (single or double), board costs (21 meals/week), and special tuition rates (e.g., flat rate for 15-18 credits)?
- By how much will total costs increase each year? (A three-to-five-year printed history of tuition and fee increases as well as room and board increases should be available.)
- Does financial need have an impact on admission decisions? Does a decision to apply for early admission affect financial aid?
- Does the school offer both financial aid based on need and on merit, or other scholarships that aren't based on financial need? Is it necessary to apply for merit aid, and if so, how do you apply?
- What application forms are required to complete the financial aid process?
- What is the priority deadline for applying for financial aid?
- When will I be notified about financial aid award decisions?
Deciding which college to attend
- What will my total costs be? Are there any other costs not listed in the award letter that I should budget for, such as expenses for books, room and board, transportation, or personal needs?
- How much financial aid will I receive?
- If the financial aid award package isn't enough to make it possible for me to attend my preferred college, under what conditions, if any, will the aid office reconsider the offer?
- If my family can't meet the financial responsibilities from current income or assets, what financing options are available to help me pay my share?
- How will my aid package change from year to year? Will loan amounts increase? What impact will cost increases have on the aid package? What will happen if my financial situation changes? What will happen if my enrollment status (or that of a family member) changes?
- What are the terms and conditions of the aid programs included in my award package (e.g., treatment of outside scholarships)? What are the academic requirements or other conditions for the renewal of financial aid, including scholarships?
- What amount of student loan debt does the typical student borrower have once he or she finishes college? Where do I fit on this scale?
Before you leave home
- When can my family expect to receive bills from the college? Is there an option to spread the yearly payment over equal monthly installments? If the bill is not paid by the deadline, will there be penalties? Does the college accept payment by credit card?
- How much money will I need during the first week of school for things like books, a parking permit, moving expenses, etc.? Can I use financial aid to pay for books and supplies? Can books be charged to my student account? What typical out-of-pocket expenses do most students have during the year?
- Is information available regarding budgeting resources, money management, and credit card usage?
Are there banking services with fee-free ATMs and/or check cashing on or near campus? Does the campus have a debit card?
- How are student jobs assigned? How many hours per week will I be expected to or allowed to work? How often and in what manner will I receive payments? Will earnings be automatically credited to my student account?
- Think about it. You wouldn't buy something expensive for yourself -- a stereo, bike, computer, or car -- without researching it and asking the salesperson questions. The same should hold for college. It's probably one of the largest purchases you'll ever make.
Paying for College
» It Pays to Save
College Costs
Financial Aid
Receiving Aid
Strategies for Paying the Bill
Loans At-A-Glance
The White House Initiative gratefully acknowledges collegeboard.com for providing the content found on this page.
|
