Painful as it may seem, you're better off knowing what your child's college education will cost. Right now, one year's tuition, fees, and room and board at the average four-year public university costs $10,636, according to the College Board. At a private college, the average is $26,854; at highly selective schools, such as Stanford or Yale, the cost is even greater. In recent years, tuition at public and private schools has increased as high as 8 percent per year.
Yes, those figures are staggering. Why not just ignore the subject entirely and trust that financial aid will kick in? Here are two compelling reasons:
- Colleges expect families to be responsible for college costs to the extent that they are able. Although colleges will go to great lengths to get the best students in their doors, for most of us, there's no guarantee that financial aid will cover what we think we need.
- Whether you pay cash or borrow, you'll pay much less in the end if you start saving and investing now. No matter what your income, time is your greatest ally. The sooner you begin saving and -- as aggressively as you feel comfortable being -- investing for college, the more time your money has to grow. Saving and investing, even in small amounts, will reduce the need to borrow in the future.
Keep in mind that college financial aid is reduced by the amount you and your child can contribute. Annual income aside, parents' assets reduce aid eligibility by a maximum of 5.65 percent; assets in a student's name reduce aid eligibility by 35 percent. Here's how it works: If parents have $10,000 in an account, colleges reduce aid eligibility by up to $565 per year. If the account is in the student's name, that same $10,000 reduces financial aid eligibility by $3,500 in the first year alone.
Read on for an overview of college financing strategies. We've included some tax credits and breaks; however, your adjusted gross income typically determines if you're qualified to participate in these programs, so it's best to consult an investment adviser or read IRS materials about the programs before setting your sights on them.
Continued on page 2: The First 5 Steps