Funding College: How Will You Do It?
Hooray, they're back... back to school, that is. Maybe this year's big-ticket item was a Spiderman backpack. Maybe it was a new computer. But one day soon, school will mean college. And that will mean college tuition. Are you ready?
If not, take heart. There are lots of ways to provide for your children's education. In addition to traditional saving methods, there are federal tax credits, scholarships, financial aid, student loans, and work-study programs that enable millions to afford higher education.
Let's take a look at some of the things you and your kids can do to pay for college:
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- Shop for college. The cost of four years at a private college can easily top $100,000, and it may be well worth it. But also consider that you can get a four-year undergraduate degree at a top-flight state university for about one-third the cost of a private college. Graduates of good state universities can earn salaries equal to those of Ivy-League grads.
- Plan ahead. Tuition costs have been rising between 5% and 6% annually. Figure out how much college will cost, and then make a plan. The sooner you start saving, the less painful it will be and the more you are likely to accumulate.
- Start saving early. Transfer money from your bank account into a college investment account every month, or contribute to a mutual fund right from your paycheck. Year after year, money that you invest may produce earnings. When those earnings are reinvested, they can generate more earnings. Those additional earnings help generate more earnings, and so on, so your savings can really add up over time. This is known as compounding. For example, if you invested $100 a month in a mutual fund beginning when your child was born and earned an 8% return on your investment, you'd have $44,940 by the time your child reached age 18.*
- Invest regularly. By investing the same amount in a mutual fund regularly regardless of what is happening in the financial markets, you buy more shares of an investment when the price is low and fewer shares when the price is high. So the average amount you pay for your shares ends up being lower than the average market price. This is called dollar-cost averaging.**
- Let your children pitch in. If your kids are old enough to work, they can help. Even $25 or $50 a month adds up over time. For example, investing $25 a month – with an annual rate of growth of 8% – would result in savings of more than $1,000 over three years. That could cover part of the cost of books and fees.*
- Check out federal tax credits. Tax legislation passed in 1997 established credits to promote higher education. For example, the Hope Scholarship offers federal tax credits up to $1,500 for a child in the first two years at a college or an eligible vocational institution. The credit is phased out for single taxpayers with incomes of $41,000 to $51,000 and for joint filers with incomes of $83,000 to $103,000.
- Take advantage of tax-free savings. Education Savings Accounts (formerly called Education IRAs) and 529 college plans are popular, tax-free ways to accumulate assets for your child's education. And withdrawals from either type of account are not taxed if the money is used for qualifying education expenses.
- Surf for scholarships. Scholarships are awarded for all kinds of reasons – not just academic or athletic achievement. There are scholarships for students who write essays, play the cello, are interested in careers in public service, or live in a particular city or state. There's even a scholarship for golf caddies! So get your teenager to visit FastWeb, a site that will search more than 600,000 scholarships for free.
- Hunt for financial aid. According to the College Board, more than $90 billion of financial aid was available in 2001–2002. Filling out the free application for federal student aid (FAFSA) opens the door to a wide variety of grants, scholarships, and student loans. The FAFSA form is available online at www.fafsa.ed.gov. You may also be able to obtain one from your child's guidance counselor.
- Find work-study programs. Work-study programs let your child take advantage of flexible schedules and on-campus programs. They also provide excellent work experience for students' resumes and help foot the college bill.
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*This example is hypothetical and does not represent the returns from any particular investment.
**Dollar-cost averaging does not guarantee that your investments will make a profit, nor does it protect you against losses when stock or bond prices are falling. You should also consider whether you would be willing to continue investing during a long downturn in the market since dollar-cost averaging involves continuous investment in securities regardless of fluctuating price levels.
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