Handbook: Preparing Your Child for College

Affording the Cost of College

Saving money in advance and obtaining financial aid are common ways for parents to make their child's education affordable. Other ways of making college affordable, such as attending college part time, will be discussed later in this handbook. (See this section.)

Saving Money

Saving money is the primary way to prepare for the costs of college. Setting aside a certain amount every month or each payday will help build up a fund for college. If you and your child begin saving early, the amount you have to set aside each month will be smaller.

In order to set up a savings schedule, you'll need to think about where your child might attend college, how much that type of college might cost, and how much you can afford to save. Keep in mind that colleges of the same type have a range of costs and your child may be able to attend one that is less expensive. You can also pay part of the costs from your earnings while your child is attending school. In addition, your child may also be able to meet some of the costs of college by working during the school year or during the summer. Finally, some federal, state, or other student financial aid may be available, including loans to you and to your child.

You will also want to think about what kind of savings instrument to use or what kind of investment to make. By putting your money in some kind of savings instrument or investment, you can set aside small amounts of money regularly and the money will earn interest or dividends. Interest refers to the amount that your money earns when it is kept in a savings instrument. Dividends are payments of part of a company's earnings to people who hold stock in the company.

A savings instrument has an "interest rate" associated with it; this refers to the rate at which the money in the instrument increases during a certain period of time. Principal refers to the face value or the amount of money you place in the savings instrument on which the interest is earned.

Every type of savings or investment has some risk that the return will be less than needed or expected. Federally insured savings accounts are safe and guaran teed up to $100,000 by the U.S. Government. However, they may have lower interest rates, making it harder to save large amounts of money for college. Bonds and stocks often have higher returns than savings accounts or EE savings bonds but are riskier. You can reduce the risks of these kinds of investments by starting to save early. The earlier you begin the less money you will have to put aside each month and the more total savings you will accumulate. You should talk with your banker or other financial professional about different savings and investment choices. You might also talk with a friend or relative who understands these choices. You can also learn about them by reading some of the magazines that have articles on saving for college.

Chart 7 shows how much you would need to save each month in order to have $10,000 available when your child begins college.

The chart assumes that you are getting a return of 5 percent on your savings. If you are able to earn more than that, your total savings will be higher. As the chart shows, if you start saving when your child is born, you will have 18 years of accumulated savings by the time your child enters college. You would only have to save or invest about $29 each month in an account earning 5 percent in order to have $10,000 at the end of 18 years. If you wait until your child is 12, you will have to set aside $119 a month. By waiting too long to begin saving, you may not be able to afford the amount of monthly savings needed to reach your goals.

CHART 7

Amount You Would Need to Save to Have $10,000 Available When Your Child Begins College

Amount Available When Child Begins College

If you start saving when your child is Number of years of saving Approximate monthly savings Principal Interest earned Total savings

(Assuming a 5 percent interest rate.)

Newborn 18 $29 $6,197 $3,803 $10,000
Age 4 14 41 6,935 3,065 10,000
Age 8 10 64 7,736 2,264 10,000
Age 12 6 119 8,601 1,399 10,000
Age 16 2 397 9,531 469 10,000

When deciding which type of savings or investment is right for you and your family, you should consider four features:

- Risk: The danger that the money you set aside could be worth less in the future.

- Return: The amount of money you earn on the savings instrument or investment through interest or dividends.

- Liquidity: How quickly you can gain

- Time Frame: The number of years you will need to save or invest.

When you select one or more savings or investments, you should balance these factors by minimizing the risk while maximizing the return on your money. You will also want to be sure that you will be able to access the money at the time you need to pay for your child's education.

If you start early enough, you may feel confident about making some long-term investments. Some investments are riskier than others but can help you earn more money over time. Chart 10 lists some of the major kinds of savings instruments and investments that you may want to use. You can get more information on these access to the money in the instrument or and other savings instruments at local banks and at your investment. neighborhood library.

Don't forget that you won't necessarily have to save for the entire cost of college. The following section tells about student financial aid for which you and your child might qualify and other ways to keep college costs down.

Financial Aid

Financial aid can help many families meet college costs. Every year millions of students apply for and receive financial aid. In fact, almost one-half of all students who go on for more education after high school receive financial aid of some kind.

There are three main types of financial assistance available to qualified students at the college level:

- Grants and Scholarships,
- Loans, and
- Work-Study.

Grants and scholarships provide aid that does not have to be repaid. However, some require that recipients maintain certain grade levels or take certain courses.

Loans are another type of financial aid and are available to both students and parents. Like a car loan or a mortgage for a house, an education loan must eventually be repaid. Often, payments do not begin until the student finishes school, and the interest rate on education loans is commonly lower than for other types of loans. For students with no established credit record, it is usually easier to get student loans than other kinds of loans.

There are many different kinds of education loans. Before taking out any loan, be sure to ask the following kinds of questions:

- What are the exact provisions of the loan?

- What is the interest rate?

- Exactly how much has to be paid in interest?

- What will the monthly payments be?

- When will the monthly payments begin?

- How long will the monthly payments last?

- What happens if you miss one of the monthly payments?

- Is there a grace period for paying back the loan?

In all cases, a loan taken to pay for a college education must be repaid, whether or not a student finishes school or gets a job after graduation. Failure to repay a student loan can ruin a student or parent's credit rating. This is an important reason to consider a college's graduation and job placement rates when you help your child choose a school.

Many students work during the summer or parttime during the school year to help pay for college. Although many obtain jobs on their own, many colleges also offer work-study programs to their students. A work-study job is often part of a student's financial aid package. The jobs are usually on campus and the money earned is used to pay for tuition or other college charges.

The types of financial aid discussed above can be merit-based, need-based, or a combination of merit-based and need-based.

Merit-based assistance, usually in the form of scholarships or grants, is given to students who meet requirements not related to financial needs. For example, a merit scholarship may be given to a student who has done well in high school or one who displays artistic or athletic talent. Most merit-based aid is awarded on the basis of academic performance or potential.

Need-based aid means that the amount of aid a student can receive depends on the cost of the college and on his or her family's ability to pay these costs. Most financial aid is need-based and is available to qualified students.

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