Planning
for a College Education?
By anyone’s standards,
paying for college is expensive. That’s why it’s so important that parents
and students avoid costly mistakes along the way. Here are some common errors
you should avoid.
Letting the Numbers Scare You
In order to develop a savings
plan, you’ll need to determine how much college is likely to cost and what you
can afford to save. There are many online savings calculators that can help you
figure out the amount you need to put away monthly or annually to meet your
goal. But don’t let the numbers intimidate you. If you can’t save as much as
you need, save as much as you can.
Not Starting Early Enough
The most common mistake people
make is waiting too long to begin saving. When it comes to saving for college,
time is your best ally. If you start saving when your children are very young,
the amount you have to set aside each month will be smaller, and the power of
compounding will make your savings grow more quickly.
Investing Too Conservatively
Saving for college is no
different from investing for any other long-term goal. You have to weigh the
benefits and risks of the investments you’re considering against what you want
to have in hand when it’s time to use the money. To keep up with rising costs,
you’ll need a diversified portfolio, with a sizable portion allocated to
equities and/or equity mutual funds. While stocks carry some investment risk,
they offer greater opportunity for growth of assets. The safest and easiest way
to invest in stocks is through mutual funds, which provide diversification and
professional money management, and make it easy for you to invest using
automatic deposits.
While equity investing is a
good idea over the long term, you’ll need to lower volatility once your child
enters high school. As college approaches, you should begin to move your assets
into more conservative investments such as short-term bond funds, U.S. Treasury
Bills, money funds, and certificates of deposit.
Saving Money in Your Child’s Name
Saving money in a child’s
name can result in lowering parents’ tax liability. However, if you plan to
apply for financial aid, it may be unwise for your child to have considerable
assets. That’s because, in determining how much a family should be able to
contribute toward college expenses, college aid formulas typically weigh student
assets more heavily than those of their parents.
Not Saving for College
If you’ve heard that the
money you have saved toward your child’s education might end up hurting your
chances for financial aid, don’t believe it. Your expected family contribution
(EFC), the amount a student and his or her family are expected to contribute
toward the cost of attending college, is based more on your income than your
assets. If your income is relatively high, your expected contribution will be
too. So it’s prudent to set aside enough to meet your obligation.
Not Learning All You Can About Financial Aid
Be sure to get educated on the
types of financial aid available. Some financial aid comes in the form of grants
or scholarships that don’t have to be repaid, but the greater percentage of
the aid disbursed is in the form of loans and work-study programs. For federal
aid and private aid from most colleges, you’ll need to complete the Free
Application for Federal Student Aid, or FAFSA. Some of the more expensive
private colleges require that you complete the CSS Financial Aid Profile as
well. The financial information you submit on these forms is used to establish
your student’s eligibility for federal assistance.
Pay close attention to
deadlines for submitting financial aid forms. Schools generally process
financial aid forms that arrive by the priority filing date (usually Feb. 1)
separately from the ones filed later. Applications that come after the priority
date may not receive the same level of aid.
Ignoring Private Scholarships
Private scholarships and
grants from a wide range of private, state and federal sources are awarded on a
range of qualifications, including ethnic background, work experience, community
involvement, and extracurricular interests. The problem is finding them. The
best place to start is with your child’s high school guidance counselor. You
also can check into college scholarship guides at libraries and bookstores. On
the Internet, www.fastweb.com
or www.finaid.org
provide information on thousands of scholarship sources. Steer clear of
computerized search services that charge a fee to match your student up with
scholarships. You can find most of the same scholarships yourself by using the
resources mentioned above.
Neglecting to Save for Retirement
Don’t let the need to save
for your child’s education sidetrack you from saving for your retirement. The
tax-deferred gains available when you contribute to a 401(k), IRA, or Keogh
account are too good to pass up. And since the FAFSA doesn’t consider
retirement assets when computing your EFC, your retirement nest egg won’t
affect your eligibility for college aid.
Paying
for college isn’t easy, but planning and investing wisely will go a long way
toward making college more affordable.