How to Pay for College ?
Next to buying a house, a college education is one of the steepest expenses you will ever face. How much will it cost? Visit http://www.savingforcollege.com/college-savings-calculator/ and you’ll see that if a child is 4 years old today, saving for his or her college education will cost $247,000 assuming college tuition costs increase by 6% each year.
Prepaid College Plans
If you’re 100% sure your child will want to study in the state where the family resides, a prepaid college plans makes perfect sense. For example, The Florida Investment Plan for example starts at $107.35 per month (depending on the child’s age or grade level) and you have the possibility of adding plans that will cover now or later essentials like local fees, tuition differential fee and dormitory housing. The best part of these plans is that they lock in tuition prices at eligible public and private colleges and universities.
529 Saving Plans
While pre-paid tuition plans allow parents to buy credits at participating colleges for future tuition, 529 Saving Plans generally allow the saver to invest in stock and bond mutual funds, money market accounts, age-based portfolios that change automatically towards more conservative saving options as the student gets closer to college age.
- These plans cover all higher education expenses such as computers which would not necessarily be covered by a Prepaid Tuition Plan.
- Flexibility to study outside your state.
- Enrollment open all year.
- No lock on college costs.
- Subject to market risk.
- Contribution limits are set at $200,000 in most cases.
- Limited enrollment period.
Some parents choose to use both plans, if there’s money left over after the student has finished his graduate education the money can be used towards a graduate degree. No matter what plan you choose, remember there are fees related to the plans, and different investment practices. The U.S. Treasury reports that families with 529s lost $25 billion from 2007 to 2008 as the stock market went south. That is why diversifying your college financing options is crucial.
These plans work like IRA’s, you make an annual or monthly contribution to an account and watch your investment grow without the burden of federal taxes. The best part of these plans is the flexibility they offer, not only you can use them to pay for college but tax-free withdrawals are allowed for private elementary and secondary school. The only caveat is that annual contributions are limited to $2,000, so to make these plans work is better to start when the child is young. For example, if you started to save by the time the child is 4 and stop when she reaches 18, you could raise $28,000 (not counting interest).
ZERO COUPON BONDS
Unlike traditional saving bonds, these financial instruments can earn interest beyond their face value. A $10,000 zero coupon bond could be worth $40,000 when it comes due. The only problem is these bonds take 10 or 15 years to mature, or even longer and you will have to pay taxes on the interest earned.
ROTH AND TRADITIONAL IRA’S
While people tend to associate these instruments with retirement and not with paying college expenses, the government allows withdrawals to pay for college without tax penalties (for Roth IRA’s). However, these should be used as a last resort since these moneys cannot be touched by creditors even if you declare bankruptcy.
FEDERAL AND PRIVATE STUDENT LOANS
If you weren’t able to save for college this is the choice you or your children will face. It is important to calculate the amount of the loan needed, the interest required, how many years will it take to pay off, whether the loan can be discharged through bankruptcy (federal loans are not applicable) and most importantly, how much will the chosen profession pay after college. This last point is extremely important since salaries are stagnating and some professions pay very little at the beginning.
If you choose a federal loan consider Subsidized Stafford loans. These loans offer interest subsidized by the federal government which dropped to 5.6% in 2008-2009 and is scheduled for 3.4% in 2011-2012. The interest on unsubsidized Stafford loans is fixed at 6.8%. Compare that to the interest in private loans which currently ranges from 9.5% to 10%, these rates aren’t fixed and borrowers normally see an interest rate increase of three or four points.
While financial expert Suze Orman prefers Stafford and PLUS loans, she does credit the new Smart Option Student Loan offered by Sallie Mae (a private loan company).
According to collegeboard.com, there are more than 2,300 sources of college funding, totaling nearly $3 billion in financial aid in their database. Scholarships range from $1,000 all the way up to fully cover tuition and living expenses. There are four major categories for scholarships:
- Merit-based: They reward a student’s athletic, academic, artistic or other abilities while looking at an applicant’s community service record and extracurricular activities.
- Need-based: Based on the student and family’s financial record, they require a FAFSA application to qualify when the scholarship is given by the government. Private need-based scholarships are also likely to require the results of a FAFSA, which calculates a student’s financial need through a formula looking at the expected family contribution and cost of attendance at the intended college.
- Minority-based: These require applicants to identify their race, gender, religion, family and medical history, or many other student-specific factors. For example, the Society of Women Engineers administers over 100 individual scholarships awards ranging from $1,000 to over $5,000 per year.
- Career-specific: These scholarships are solely reserved by a college or university to students planning to pursue a specific field of study. Many times the most generous awards are given to worthy students studying high-demand careers such as education or nursing.
JOINING THE MILITARY
One of the advantages of joining the U.S. Armed Forces is having access to the GI Bill which can provide $40,000 or more towards your college education plus give you free training in all kinds of professions such as engineering, photography, communications, administration, law, etc. With that being said, the military isn’t for everyone:
“The military can be a lot of work, especially at first. The military can also be boring and frustrating (sometimes “being all that you can be involves a lot of sitting around and waiting). Most importantly, there is a chance that, as a soldier, you will be called upon to go into a combat situation where you could be put in a position where you could either die or have to kill another person. By joining the military you are saying (in a legally binding manner) that you are comfortable taking this risk. If you are comfortable taking that risk and you don’t have any spectacular opposing offers, then the military is probably a very good choice for you.”
Click here to read an article that discusses the pros and cons of joining military that a high school student should consider.
IS IT ALL WORTH IT?
The National Center for Education Statistics says it is. Although it seems like ages ago, statistics proved education to provide a competitive advantage in the workforce a few years back. In 2004, those with a college degree suffered an unemployment rate of 2.7%, those with a high school diploma 5% and those who didn’t complete high school and 8.5%. In other words, without a college diploma you’re used to be up to 3 times more likely to be unemployed.
But how do those statistics apply during a recession like the one we’re experiencing in 2009. According to USA Today: “Unemployment among college graduates is still half that of high school graduates. A college education payoff is at least as high as it was before the recession. You’re so much less likely to struggle if you have an education,” said Sandy Baum, senior policy analyst at College Board.
While a college education shouldn’t be seen as a magic pill that cures all problems, careful planning can deliver opportunities without creating burdens. That alone is priceless.