Baby diploma

How To Pay For College

Wednesday, August 10th, 2011

A new survey of moms found that 76 have financial concerns, and paying for school or college is at the top of their list.  I assume that their spouses share that concern about getting the kids from diapers to diplomas, so here are some ways to pay for college.

Figure Out How Much College Might Cost

The best free online calculator for estimating college costs is on the web site of SavingForCollege.com (look for the College Cost Calculator).  After you enter your child’s current age (let’s use age one as an example), the calculator will give you a number.  A big number.

You can get more specific estimates by picking specific schools.  Where it says, “Your child: will be attending a college that currently costs $25,000 annually,” click on “Help” and you’ll be able to go to a web site where you can get the costs of different schools.

The total annual in-state on-campus cost at Arizona State right now, for example, is about $22,000.  About 70 percent of beginning students receive scholarship or grant aid averaging about $8,000 (info that’s available at the same site where you get the tuition and room and board costs).  So, you could base your projections on an annual cost today of $14,000.

Determine How Much of the Tab You’ll Pay

Different parents have different philosophies.  Some want to pay for all of their kids’ college expenses.  Others want their kids to pay for at least a portion of the cost.  Talk it over with your spouse.  Let’s say you decide to pay half:

  • Plug $14,000 into the College Cost Calculator
  • Choose 50 percent as the percentage of the cost you plan to cover
  • Decide whether you want to have all the money saved by the time your child starts college or whether you plan to keep investing while he or she is in school (I chose the latter)
  • Indicate how much you have saved so far (I put in zero)
  • Pick the rate at which you think college costs will rise each year (I entered 8 percent)
  • Pick an expected rate of return on the money you invest (I chose 7 percent)

Hit “Submit,” and it’ll tell you how much you need to save.  In this example, that’s $246 per month.

If you have multiple kids, you’ll have to run separate calculations for each one.

Consider a 529 Plan

Every state offers a so-called 529 savings plan.  It’s a tax-advantaged way to save for college, with any interest earned coming to you tax free, as long as the money is used for college costs.

You can choose any state’s plan and, in most cases, the money can be used for qualified expenses at schools in any state.

One reason to consider your own state’s plan is that in some states you get a state income tax deduction on the money you contribute.

These plans offer several investment choices, usually including an age-based fund that’ll automatically shift to a more conservative investment mix as your child gets older.  The SavingForCollege.com web site mentioned above rates each state’s plan and provides a lot more information about 529 plans.

Start Early

The earlier you get compound interest working for you the less you should have to set aside each month or year.

In the above example, if you wait until your child is 12 instead of starting to invest when he or she is one, you’ll have to invest $367 each month.

Get Relatives Involved

Encourage your kids’ grandparents or other relatives to contribute to their college fund as birthday or Christmas gifts.  Or, ask for contributions as baby shower gifts.

Consider a Community College

If your kids are willing to go to a community college for the first two years, that can save a lot of money. After they transfer to a four-year school, that’s where their degree will be from.

One family got their kids to opt for this route by telling them they’d be better able to help them with a down payment on a house down the road.

Match Your Kids’ Investments

When your kids are very young, it’s probably unrealistic to get them to save for such a distant goal as college.  However, when they get to be about 12 or so, you may be able to motivate them by matching some of the money they invest.

How else have you tackled the college funding challenge?

Know someone else who would benefit from this article?  Please forward a link to my site.  And if you haven’t done so already, you can subscribe to this blog by clicking here.  Two or three times a week, you’ll receive ideas and encouragement for using money well.

Categories: Saving/Investing

9 Responses to “How To Pay For College”

  1. Jeff Herron says:

    There is mounting evidence that a college education isn’t worth what it used to be. Outside of specialized skills required by students who show exceptional promise (medical, legal, sciences, etc.), trade schools, apprenticeships, and plain old going to work right out of high school are looking like better, more affordable options for children of most middle-class families.

    Your analysis of college costs misses two important factors: historically low interest rates and market performance (compounding isn’t very effective when interest rates are around 1% and stock market returns are flat for over a decade and counting), and inflation (after being parked for 15 years, your money that grew at 7% annually [and I don't know anyone getting those kinds of returns consistently anymore] is now worth 20% less!).

    College is either a luxury for the well-off and/or exceptionally gifted or it is an analog of high school; in the former case it is out of reach for most and in the latter it is unnecessary. Either way, I think most parents of young children need to start imagining a “college-free” future.

  2. Matt Bell says:

    Jeff – College may not be for everyone, but I believe it’s more important than ever. With the flattening of the global economy, outsourcing, etc., it’s essential that today’s workers focus on being excellent at what they do and that they regularly upgrade their skills. We are planning to help our kids pay for college and I recommend that most parents do the same.

  3. Jeff Herron says:

    I agree that college-level instruction may be helpful for many. The hard reality is that the cost of acquiring this instruction conventionally is increasingly out of reach for the middle class.

    One other option to consider, then: Online college courses.

    MIT has its entire curriculum online, free to all comers: http://ocw.mit.edu/index.htm. With a little digging, lots of other free or low-cost online resources are available.

    Lots of other ideas about reducing college expenses here: http://www.lewrockwell.com/north/north988.html

    With the unemployment rate for recent college graduates hovering between 15 and 25%, if a college-level education is pursued, it may be best to do so in as non-traditional and cost-effective a manner as possible. Any level of school debt is hard to repay when the only jobs available upon graduation are paying minimum wage.

  4. Greg Sargent says:

    My wife and have three sons, but they grew up too fast. Before we knew it they were nearing college age, and we had not managed to save much to put toward college costs. No excuses, we just dropped the ball. So we needed to find another way.

    When our oldest was heading to college in 2006, besides beating the bushes for scholarships, we set out to buy a rental property that would provide his housing in the college town, and would provide us with some cash flow by renting out to several roommates. This has worked beautifully. He lived in the dorm his first year, and our monthly cost for his room and board was $750. The next year we bought a rental property. His housing costs were then covered by the rent coming in from roommates, and we were generating several hundred dollars a month in positive cash flow. That went a long way toward covering his tuition and other expenses.

    When our second son entered a different college in 2009, we did it again. He lived in the dorm the first year (fortunately fully covered by a one-year scholarship), while we shopped for a rental property. Bought it in March 2010, spent 6 months fixing it up, and he and 5 other guys moved in last September. Same deal – it is providing his housing, and the rental income is generating cash that helps cover his tuition.

    Extra benefits:
    We can control, to some extent, who our kids live with. For the most part our sons have been able to find roommates who share their values and lifestyles.
    We are providing reasonably-priced, safe housing for some of our kids’ friends. (Much cheaper than the dorms).
    Our sons are learning some responsibility, home repair skills, and financial skills by being the onsite managers.
    We will still have two money-making properties after our kids are out of college, if we decide to keep them (the houses, not the kids). This will help us catch up on retirement savings.

    Landmines:
    Constant repairs – works best for landlords with handyman skills (fortunately I love that kind of work).
    Tenant issues – sometimes they can’t/don’t pay. Some turnover and vacancy can be expected.
    Property values have dropped, so we would probably take a loss if we were to sell either property now.
    Financing – it is easy to get overleveraged if you are borrowing money to buy properties.

    So you need to weigh the risks and benefits of this strategy, but it might provide an alternative funding source for families who, like us, don’t have the college savings they need. It’s certainly not for everyone. Having the money in the bank when our kids hit college age would have saved us some sleepless nights, so that would still be the best strategy.

    We have one more son who will enter college in 2013. Will we buy another rental property? Don’t know yet… but we’re open to it.

  5. I post a lot about college costs because my oldest entered college last year. Like Greg, we found we weren’t quite ready, but we are determined to do it without loans.

    Greg, I find your rental stories fascinating. Do you plan to sell them when your sons graduate or hold onto them long-term?

  6. Matt Bell says:

    Greg – Thank you for sharing your experiences with using rental properties to help manage college costs. It’s a creative and bold strategy. I also appreciate you sharing the cautions. It sounds like you went into these purchases with your eyes wide open, recognizing the risks and all the work involved, but also mindful of the potential rewards.

  7. Greg Sargent says:

    Julie, how long we will hold onto the houses depends on couple things.

    First, how much the “hassle factor” increases when our sons no longer live there. We know we will have to work harder to find and keep good tenants, and the potential for damage to the units will go up when we don’t have a family member keeping watch. One of our properties is in another state and about a 2 hour drive away, so it is already more of a hassle than the other, which is close to our home.

    Second, as we grow older, our health will be a big factor. Some people’s skill set and internal wiring make them better suited than others for managing and maintaining rental properties. I enjoy the challenges. My wife – not so much. So if/when I become less able to manage the properties, we will unload them so that she is not burdened with that – unless of course our sons are able to stay involved in the property management after they finish their college stints.

    That being said, I would like to think we could hang on to these properties, and continue to benefit from the rental income, for many years after our children have moved on.

  8. Emily says:

    I’m going to side with Jeff on this one. College is not necessary to make a good income. DH and I are not saving for DS’ college. He will be encouraged to be an entrepreneur; a few business community college courses on the side will be enough get him running full speed ahead.

  9. Matt Bell says:

    In fairness to all who say take a pass on college, I just came across this article on well-paying jobs that don’t require a 4-year degree:

    http://www.moneycrashers.com/six-figure-income-jobs-without-having-a-degree/

    I still think it’s wise for most young people to pursue a college degree, as long as they can do it without getting buried in debt, but clearly there are some alternatives.

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