The days of depending solely on scholarships and grants to pay for college are long gone for most students, experts say. With dramatically increasing tuition costs for both public and private colleges and universities, many parents face the daunting task of personally financing their child’s education.
Over the past 10 years, studies performed by The College Board, a not-for-profit membership association connecting students to college opportunities, show that average annual college expenses have increased 36 percent in public four-year universities to more than $11,000 and more than 51 percent in private schools to $27,000. Similarly experts predict a yearly 3 to 10 percent tuition increase in the future.
“If you haven’t written a check to a college or university for tuition in a while, you might experience sticker shock to find out how much it costs to send a child to college today,” Alabama State Treasurer Kay Ivey stated in a recent press release. “It is so important for families to begin saving and planning now to meet the financial challenge of paying for future college expenses.”
According to experts, the amount of savings students have before entering college may be their only protection from excessive student loan debt and getting a head start is the key to accumulating adequate savings.
As Judson College director of financial aid for the past 19 years, Doris Wilson advises parents to expect college expenses because students rarely get all costs paid through scholarships.
“I see a lot of people who have not planned, and it is tough for those people,” Wilson said. “They end up with a lot of debt. I think any person in higher education would advise people to plan ahead, so you don’t have to rely on borrowing to pay for all of your college costs. You want to avoid that if you can, and you can if you start soon enough with your savings.”
University of Mobile financial director Marie Thomas agreed.
“With today’s tuition costs where they are, I think it is very important for parents and students to save for college because it is an investment in their child’s future,” Thomas said. “College is not just a flippant decision. It’s what they are going to do for the rest of their lives.”
Many experts say parents should start saving as early as possible.
“When a child is born, you ought to start planning for their college education,” said Wray Pearce, a financial planner with Pearce, Bevill, Leesburg & Moore in Birmingham. “If they save in small amounts early, it will grow rapidly and the money will be there when the child needs it.”
Crown Financial Ministries calls college education expenses possibly the No. 1 financial concern of new parents.
“It is never too early for parents to begin to plan for their children’s education, but they need to get informed, pray for wisdom and discernment and then get started,” according to the organization’s Web site. “God is faithful and He will provide, but He also expects parents to be good stewards of the funds that He has entrusted to them by starting early to prepare for their children’s educational future.”
Fortunately there are many options for savings available to parents.
-Uniform Gift to Minors Act account.
“This kind of account puts the investment into the child’s name,” according to Crown. “The parent gives up all ownership rights; however, the parent does retain control of the assets until the child reaches the age of majority (18 or 21 in most states).”
4Education IRA account.
With these accounts, Crown indicates parents with a gross family income below $150,000 may contribute up to $500 per child per year and all earnings grow tax-deferred.
-State-sponsored 529 plans.
“In general, prepaid state tuition plans promise that your investment in the plan is guaranteed to cover tuition at any public school in the state, no matter the tuition cost at the time your child enrolls,” according to Crown. “The price is locked in regardless of future increases in state tuition.”
Pearce added that income in these plans accumulates tax-free as long as it’s used for educational expenses, and parents can give up to $11,000 per year per child.
“The IRS will also let you pregive as much as $55,000 in one year and treat that gift as if it were made over a 5-year period,” said Pearce, who paid his four-month-old grandchild’s tuition in a one-time gift of $21,000.
He advises parents to look for low expense, low commission and well-performing plans before making a selection.
“If they don’t feel comfortable, they need to contact a financial planner or broker for help,” Pearce said.
Many parents also worry about losing their money if a child decides not to go to college, but this is not the case, experts say.
“On the 529 plan, you can transfer that money to another child freely including nieces and nephews, or you can cash it in and pay tax on the income that’s accumulated plus a 10 percent penalty,” Pearce said. “But you still end up with more money than you put in.”
-Prepaid Affordable College Tuition (PACT) program.
“These plans are established by individual states, but often they do not require you or the college student, unlike prepaid tuition plans, to be a resident of that state or attend a post-secondary institution in that state,” according to Crown.
Pearce added that the Alabama program offers a monthly payment option as low as $100 for younger children.
“You can give to the PACT program today and know that the child’s education is paid for 18 years in the future,” he said.
-Personal savings accounts.
“You may want to save for your child’s education in your own account, in your own name in a variety of investment tools: insurance policies and annuities; fixed income investments (CDs, Series EE bonds, and zero coupon bonds); and no-load stock mutual funds,” according to Crown.
Although it is best to start saving early, Thomas said it is not too late for parents with less than enough money saved for college.
“The ones that have not planned ahead still have payment options out there,” she said. “Consider at least five schools when you narrow down your choices, because some schools will work with you to make an acceptable package for your family depending on your income. Consider the payment options that the schools offer before you make your decision on a college.”
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