Funding Your Child's College Education

In addition to purchasing a home, funding your child’s college education could be one of the largest expenditures you ever make.

According to the College Board, the average tuition in 2010 for a 4 year in-state public school is $33,300 and a staggering $119,400 for private colleges. That’s just the tuition! Now factor in living expenses, cost of dorm and board, computers, and textbooks, you are all of a sudden looking at close to $200,000 for a 4-year undergraduate degree. Furthermore, with most states still reeling from the latest financial storm, the College Board anticipates that college tuitions will increase at a rate almost double that of inflation.

Despite the cost, the economic benefit of having a bachelor’s degree is undeniable. According the US Census Bureau, in the year 2009, the average male college graduate, aged 25-34, earned 85% more than their counterparts who only have a high school degree. Among women the same age group, the advantage is a resounding 111%.

So how does a family go about saving for a college education? There are basically 4 options – write the check, borrow now and pay later, find scholarships and grants, or better yet, set aside money today and let it accumulate over time.

Write the check

Plenty of families simply write the check as the tuition bills arrive in the mail. This approach is fine as long as you have enough money socked away and it is readily available. Most families run into trouble with this approach when they start tapping into their emerging savings, or even retirement accounts. Some families even take out lines of equity on their homes to help pay for the tuition bills. As a general rule, parents should never jeopardize their own retirement or financial well-being in their attempts to fund the children’s education. After all, there is always college aid, but there is no retirement aid.

Borrow Now and Pay Later

For those who don’t have the means to fork out tens of thousands of dollars, there is always the option to borrow. Not surprisingly, there are plenty of entities willing to lend to students and families. These entities may include the federal government, the school itself, and private sector. The Federal Student Aid Programs offer several low interest rate loan programs such Perkins Loans, Stafford Loans, and Direct PLUS (graduate and professional degree student borrowers). These loans can typically be paid back over an extended period of time following graduation. Additionally, you may also take out student loans from many banks, credit unions, and other private lenders.

Apply for Scholarships and Grants

Fortunately, there is also free money available from both the federal government and the private sector. The federal government has several programs that provide free financial assistance, called “grants”, to those in need. Some schools also provide grants to help make up the difference between college costs and what a family can be expected to contribute. There are also other grants, known as merit awards or merit scholarships, that are awarded based on academic achievements. Additionally, many companies, non-profit organizations, or foundations also offer scholarships to those that fit specific criteria set forth by these organizations.

Start Saving Today

Arguably, the best option a family has is to simply plan ahead and start saving today. There are several options depending on your objectives (maximize return potential, safety of principal, liquidity concerns, time/age restrictions, etc). The most popular options are 529 plans, Coverdell Education Savings Accounts, Qualified US Savings Bonds, custodial accounts, or savings accounts. Each account has its advantages and disadvantages, and families should thoroughly research their options or consult a professional before making a decision.