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Sending Your Child to College

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A down payment

Most parents save only a portion of their child's education costs before college. Typically, they put aside enough money to make a down payment on the college bill (in the same way one might purchase a home), and then supplement this down payment at college time with other sources of income, including financial aid.

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Being able to send your child to college is near the top of the wish list for most parents. A college education can open doors to many opportunities, and is increasingly necessary in today's economy. But that diploma doesn't come cheap. Unless you are very well off financially, it's difficult to sit on the sidelines for years and then suddenly find the money to pay for college when your child is ready to go.

College costs

For the 2012/2013 school year, the average annual cost for a four-year public college is $22,261 (in-state students) and for a four-year private college, $43,289 (Source: The College Board). Total figures include tuition and fees, room and board, books and supplies, transportation, and personal expenses.

It's a likely bet that costs will continue to rise, but by how much? Annual increases in the range of 4% to 7% would be in keeping with historical trends. But keep in mind that the actual percentage increase in any year could be higher or lower, and the rate could vary from public to private college.

How will I pay for it?

Year after year, thousands of students graduate from college. So how do they do it? Many parents save less than 100% of their child's education costs before college. Typically, they put aside enough money to make a down payment on the college bill (in the same way you might purchase a home). Then, at college time, parents supplement this down payment with:

  • Current income
  • Federal PLUS loan
  • Private loans (e.g., home equity loan, margin loan)
  • Investments (e.g., 529 plan, mutual funds, 401(k) plan, cash value life insurance)
  • Federal and college student-based financial aid (e.g., student loans, grants, scholarships, work-study)
  • Child's savings, investments, and/or earnings from a part-time job
  • Gifts from grandparents

How much should I save?

You'll want to put aside as much money as you can in your child's college fund. The more money you put aside now, the less you or your child will need to borrow later. Start by estimating your child's costs for four years of college. Then decide how much of the bill you want to fund--100%, 75%, 50%, and so on. Use a financial calculator to determine how much money you'll need to put aside each year to meet your goal.

In many cases, the amount of money you set aside really comes down to how much you can afford. Every situation is different. You'll need to take a detailed look at your family's finances to see what you can afford to add to your child's college fund each month or year.

Start a savings program as early as possible

Perhaps the most difficult time to start a college savings program is when your child is young. New parents face many financial strains that always seem to take over--the possible loss of one income, child-related spending, the competing need to save for a house or car, or the demands of your own student loans. Yet this is the time when you should start saving.

When your child is young, you have time to select investments that have the potential to outpace college cost increases (though investments that offer higher potential returns may involve greater risk of loss). This table shows what a consistent monthly investment might grow to over a certain period of years.

Amount
Invested

5 years

10 years

15 years

$100

$6,977

$16,388

$29,082

$300

$20,931

$49,164

$87,246

$500

$34,885

$81,940

$145,409

Note:   Table assumes an after-tax return of 6%. This is a hypothetical example and is not intended to reflect the actual performance of any investment.

You'll also benefit from compounding--the process of earning additional funds on the interest and/or capital gains that your investment earns along the way. With regular investments spread over many years, you may be surprised at how much you can accumulate in your college fund.

Don't worry if you can't save hundreds of dollars every month right from the beginning. Start with a small amount, and add to it whenever you can.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013. Tracking#: 1-161156

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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