Here's a question that's as
pleasant to consider as a fraternity hazing: How will you come up with
the money to send your child to the campus of his or her choice?
Anyone looking forward to a college education
better start working it out now because of the high costs and increases
and expectations that parents will pay part of the costs associated with the education. Several stock mutual funds are
worth looking at if you are planning ahead.
Note - Some of this information in this report might be dated but the
basics are worth understanding. You can also investigate the some
of the resources available here.
If you're like most Americans, your answer is probably loans--unless you start saving and investing more effectively. According to a recent MONEY poll, fully 87% of U.S. moms and dads expect their kids to go to college. But nearly half of them, 47%, have not yet stashed away any money to cover the costs, which currently run an average of $7,118 a year for tuition, fees, room and board at four-year public schools and $18,184 at private universities, according to the College Board. And at the current growth rate of 5% a year, the cost of a four-year degree is projected to rise to $73,834 (public) and $188,620 (private) for a child born in 1997.
The survey of 1,118 adults with children, conducted by ICR of Media, Pa. (margin of error: plus or minus 2.9 percentage points), also provides a wake-up call for parents who say they are saving for their kids' college costs. More than half stash their savings in unwise college investments, such as certificates of deposit. And nearly a quarter of parents who are saving are putting away a paltry $500 or less a year for each child.
Of course the student can lessen a parents burden by working part time and by pursuing scholarships. But financial experts say that the average parent should be prepared to pick up at least a third of total college costs.
If you
haven't saved enough for your kids when they are in high school now you
need to check out what options you have for student loans to borrow for
their college. If your children are younger, however, the sooner you start to save, the better.
As a parent you should be putting away college money for your son or
daughter when they are six months old, but the later is better than not
at all. An Oakland registered nurse, a late starter, stashes a whopping $12,000 of her $70,000 annual salary into college savings for her daughter
who is now 15.
But whenever you start your savings regimen, you
can maximize your dollars by planning and investing wisely. Later in
this article, we suggest investment strategies for families with
college-bound children. But before you get to the specific advice, study
these basic rules--the dos and don'ts of smart investing for college:
Do set family goals. You must first figure out how much you need to carve out of today's spending for tomorrow's college costs. To do this, you can use the savings calculators included in
many popular software packages or online.
"Parents and children should work together to make sure they are focused on the same goal," says James Pearman of Fee-Only Financial Planning in Roanoke. "That way, you can face tough questions early on--for example, what to do if you are planning to pay for 75% of tuition at an in-state public school and your child wants to go to Harvard."
Do start saving early. Every year, as your investment principal grows, so do the earnings on your money. The lesson is simple: Don't put off investing.
Do invest in stock mutual funds. According to the MONEY poll, parents saving for college have plowed 53% of their education investments into low-risk--but low-interest--CDs and savings accounts at banks and money-market mutual funds. The parents have invested only 23% of their money in stocks and stock funds. That's a serious mistake. While stocks carry some risk, they are your best bet for making your money grow over five years or more. Since 1926, stocks have gained an average of about 11% a year, more than any other type of investment. Moreover, you can't count on bank account and CD yields to keep pace with tuition hikes.
The safest, easiest and most disciplined way to invest in equities is through mutual funds. Not only do funds offer diversification but many will also waive initial investment minimums if you make automatic deposits every month, typically as little as $50 or $100. To avoid having any money siphoned off in commissions, stick with no-load funds like the ones we name in this article.
Don't neglect saving for retirement. Planning for your child's education should not sidetrack you from making regular contributions to your own 401(k), IRA or similar tax-deferred retirement account. You simply don't want to miss the chance to make the most of the tax-deferred gains available in such accounts. And retirement assets won't affect your eligibility for federal need-based college financial aid.
Don't invest in
things that give little or no return. From time to time, you may
encounter sales pitches encouraging you to save for college with
investments such as annuities or cash-value life insurance. Both defer
taxes on your investment earnings but at the price of costly withdrawal
rules. Many deferred annuities, for example, charge penalties of 7% or
more if you need to take out money within seven years of making your
investment. Tempted to buy zero-coupon Treasury bonds, which recently
yielded 6.6%? They can be fine investments--as long as you buy ones that
will be redeemed when you need the money. If you have to sell a zero
before maturity, you may lose principal if interest rates have risen
since you bought it. Prepaid-tuition plans, another way of building up
college savings, can make sense if you're too nervous to invest in
stocks.
Don't put your money in your child's name if you hope to get financial aid. College financial aid formulas generally require a child to contribute 35% of his or her assets toward costs, but parents typically need to put up no more than 5.6% of their savings.
With those basic dos and don'ts at the heart of your investment strategy, here are moves to make, based on your kid's age:
If your child is 13 or younger, you have enough time to weather any
short-term stock market squalls. Investment strategists therefore
recommend that you put 75% to 100% of your college savings in stock
funds, depending on how much risk you can tolerate, and the rest in such
fixed-income investments as bonds and bond mutual funds. You might start
your savings program with a fund that holds shares of large and mid-size
companies with consistent earnings gains and strong growth potential.
After you have accumulated $5,000 in your starter portfolio, you can
move as much as a third of your holdings into small-company and
international stock funds, which offer the prospect of juicier returns
but also carry greater risk.
If your child is 14 or older, reduce risk to safeguard savings. Zabalaoui recommends getting at least 50% of your money out of stocks by the end of your child's freshman year and moving all of your college savings for that child into short-term bonds, fixed income and cash by the end of her sophomore year. To keep risk low, most investment experts prescribe short- and inter- mediate-term bond funds, which will add more pop to your total return than CDs or U.S. Savings Bonds.
So there are some Do's and Don'ts to give you some guidelines to
operate on.
