How to Budget and Plan for Your Child's College
If you want to help your child afford college, here's how to prepare
You want to create a budget and plan to pay for your child’s college education. You’re just not sure how.
College tuition has been climbing every year at a rate that’s faster than inflation. How can you possibly plan for what college will cost when your kid is ready to enroll in his or her freshman year?
Here are a few tips and pointers.
1. Use Today’s Tuition and Fee Rates as a Benchmark
Yes, tuition does rise faster than inflation, so how can you figure out future costs?
You can at least use today’s rates as a starting point to determine the cost of education in the future.
The average published tuition and fee price for in-state students at public four-year colleges is currently $9,410 per year as of the 2015 to 2016 school year, according to the College Board. If you were to pay for that out of pocket, that would come to a total of $784 per month.
Using this as a starting point, work backwards. How many months do you have left before your child goes to college? How much money will you have to set aside each month? It should be invested into an account that has a rate of return that keeps pace with inflation.
For example, let’s say your goal is to save enough money to cover today’s average tuition and fees for all four years, which would be $37,640.
Let’s also say that your child is going to go to college 10 years from now - 120 months.
Divide the target amount ($37,640) by the time (120 months), and you arrive at $313.66.
This means that each month in this particular example, you would save $314 into an investment account. Put the money into some type of index that at least keeps pace with inflation. It should preferably have a history of beating inflation without taking on undue risk.
For example, some people might choose a total stock market index which broadly tracks the entire overall U.S. market, balanced with a total bond market index.
They would then make contributions of $314 per month, every month, regardless of whether the market is moving up or down.
2. Use Tax Advantaged Plans
Both of these types of account structures offer tax advantages and should be the primary target of your college savings investment dollars.
3. Choosing the right loans
When seeking financial aid, students have several different options to choose from. The first step to securing aid is filling out the FAFSA to determine eligibility.
Once you know how much aid you’re eligible for, you’ll know which loan is right for you. There are several federal loans available, including:
- Federal Direct Stafford/Ford Loans (Direct Subsidized Loans)
- Federal Direct Unsubsidized Stafford/Ford Loans (Direct Unsubsidized Loans)
- Federal Direct PLUS Loans (Direct PLUS Loans)—for parents and graduate or professional students
- Federal Direct Consolidation Loans (Direct Consolidation Loans)
If you don’t qualify for federal loans, you can also apply for a private student loan. These loans typically have much higher and variable interest rates.
If at all possible, try to secure a federal loan, which will have a fixed interest rate as well as more flexible repayment options.