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Sunday, May 18, 2008

Thoughts on Planning for College

What are the best ways to plan for college? And what should you expect to pay for college?

According to a recent U.S. News and World Report article written by Kim Clark, yearly college costs, without grants, vary from $4,552 for community college, to over $35,000 for private universities. Of course, grants reduce the family burden -- when they are available.

Most families use a combination of debt and savings, and sometimes grants and scholarships to pay tuition. But there are a number of useful guidelines when saving for college. Consider the following:

Save early and often: Start when your children are young, if possible. In fact, if you plan on having children, there is no need to wait until they are born. Consider setting aside money even before the birth of your first child.

Don't worry about the amount: Are you falling short of your goal? Probably. But, who doesn't?

First, you will never have enough. Certainly, it's best to stretch your finances now as much as possible. You will thank yourself later.

But, second, do not give up if you cannot meet your contribution goal in any given month. If your finances are tight, contributing (for instance) $50 instead of the usual $300 is better than nothing. If you contribute that $50 in a mutual fund which grows at an annual rate of 8% over 16 years, that single contribution will be worth almost $180 when withdrawn. This is enough for a few college-priced text books. The lesson: Even a little helps. Just do the best that you can, and relax about it.

Don't be afraid of account volatility if your children are young: If your children are young, remember that several economic cycles will pass before they enter their first year of college. Thus, even if the market suffers a downturn (a likely scenario), contributing to a college account with growth potential -- such as in a mutual fund investing in growth stocks -- will provide a much greater potential for appreciation than a simple savings account. Of course, there are risks. However, placing even a portion of college funds in equity mutual funds will allow for growth.

Reduce exposure as your children approach college age. It is also wise to reduce risk as your children age. While youngsters will live through several economic cycles before college, your account will not recover from a devastating market downturn suffered as they approach their college years.

Be realistic about your little darlings. We all hope for the best for our children. However, contributing all or a significant portion of college funds to a Uniform Gifts to Minors Account (UGMA) or to a Uniform Transfers to Minors Account (UTMA) may not be the best choice. Your little darlings will own that account when they become adults; there is no guarantee that at the age of 18 they will use the funds for college. Busting your budget today, only to finance a beer party 16 years later is probably not what you had in mind. There are plenty of financial vehicles available which will give you control in later years.

I will discuss some of the best and most used investment vehicles in a later post.

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