Tell me about saving money for college.
"How can my child go to college when I have no money?"Children from families with limited and low-incomes can and do go to college. How do they do it? By saving money, by earning scholarships and grants, and by investigating and applying for other sources of financial aid.
Saving money is the number one way to prepare for the costs of college. The sooner you start setting aside a certain amount every month or each payday, the more money you will have available for college.
Begin saving early and the amount you have to set aside each month will be smaller.
The U.S. Department of Education designed the chart below which shows the amount of money you would have to save each month to have $10,000 when your child begins college. The amount varies depending on the interest rate you obtain and the number of years that you save.
Of course, you may want to save more than that – depending on the college you think your child will attend.
Remember: The higher the interest rate and the earlier you begin to save, the less you need to set aside each month.
Amount Available when Child Begins College
| If you start saving when your child is | Number of years saving | Monthly savings | Principal | Interest earned | Total savings |
|
Assuming a 4 percent interest rate |
|||||
|
Newborn
Age 8 Age 12 Age 16 |
18 14 10 6 2 |
$32 45 68 124 401 |
$6,912 7,560 8,160 8,928 9,624 |
$3,187 2,552 1,853 1,144 378 |
$10,099 10,112 10,013 10,072 10,002 |
|
Assuming an 8 percent interest rate |
|||||
|
Newborn
Age 8 Age 12 Age 16 |
18 14 10 6 2 |
$21 33 55 109 386 |
$4,536 5,544 6,660 7,848 9,264 |
$5,546 4,621 3,462 2,183 746 |
$10,082 10,165 10,062 10,031 10,010 |
Some things to think about when setting up your savings program:
Where is your child likely to attend college?
What kind of college is he/she likely to attend – public, private, two-year, four-year?
How much does that type of college cost?
How much you can afford to save?
Keep in mind that colleges of the same type have a range of costs.
"Oh no! Our child is fourteen and we haven't saved a penny for college. We can't possibly set aside $200-300 a month now. What should we do?"
Save as much as you can. Do it regularly. Think of it as a bill that will be due every month – just like your water and electric bill. Of course, early is better. But don't give up because in addition to savings, there are other ways to pay for college.
You can pay part of the costs from your earnings while your child is attending school.
Your child can pay some college costs by working during the school year or during the summer.
Federal, state, or other student financial aid may be available, including loans to you and to your child.
What kinds of savings instruments or investment plans should I consider?
The simplest savings instrument is a savings account at your bank or credit union. Unfortunately, most savings accounts pay a low rate of interest, which means your money grows at a slow rate.
Interest refers to the amount that your money earns when it is kept in a savings instrument.
Principal refers to the face value or the amount of money you place in the savings instrument on which the interest is earned.
Banks also offer CDs which are certificates of deposit. Some CDs require a minimum balance and require you keep the money in the CD for a fixed time period.
Money market funds are savings accounts offered by banks where your money is invested in a wide variety of savings instruments. Such funds usually require a high minimum balance. The interest rate is usually higher than with a savings account.
U.S. savings bonds earn market-based interest rates. They can be purchased from banks and through employer payroll deduction plans in amounts as little as $50.
Mutual funds may be invested in U.S. government securities or in stocks and bonds. You can purchase a mutual fund through an investment firm, brokerage house, banks or directly by mail. The interest rate varies and depends on how well the money is invested.
Individual corporate bonds represent a promise by a corporation to repay the face value of the bond, plus a fixed rate of interest, at a specific future date.
Individual corporate stock represents part ownership of a company. You make money on stocks either through the dividends you earn or by selling the stock at a price that is higher than the price for which you bought it. Interest rates vary.
Dividends are payments of part of a company's earnings to people who hold stock in the company.
There are several things to consider when deciding where to invest your college savings.
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 access to the money in the instrument or investment.
Time Frame: The number of years you will need to save or invest.
Now that you have a grasp of the basics, you're ready for the details. You can get them at the U.S Department of Education web-site which explains the pros and cons of investing in various savings instruments. Take me there now!
Start early.
Save regularly.
It's a down-payment
on your child's future!
