Smart Saving for College

Saving for College

 

Saving for College with Compounding


Don't be daunted by the amount you may have to save. Small amounts of money, if invested early, can become sizable investments through the remarkable power of compounding. For example, if you save $200 a month at an 8 percent annual rate of return for your newborn child, you will have over $96,000 for college when she turns 18. Use our College Savings Calculator to see how early and regular saving can make your money grow.

Use our College Savings Calculator to estimate the amount of money to invest each year to cover your child's college education. Remember to factor tuition, room, board and books into your calculation. If you know where you want your child to go to college, but don't know the current costs, you can use the National Center for Education Statistics' school locator to research the costs. If you are unsure where you want your child to go to college, The College Board® says a year at a private four-year college, for tuition, room and board, now averages $35,636 and the same year at a public four-year college averages $15,213.

The Power of Compounding

Financial Aid and Savings

As part of saving for college, you need to know whether your child will be eligible for financial aid, which reduces what you may need to save for college.

Smart Tip. Be aware that saving for college might impact financial aid. Any investments or savings can affect federal financial aid eligibility. The impact on financial aid varies depending on whether the savings belong to the parent or the child. Savings in a parent's name can reduce federal financial aid eligibility by at most 5.64 percent, but assets saved in a child's name can reduce aid eligibility by 20 percent. The good news is that, as of 2009, 529 accounts owned by a child, or set up as a custodial 529 account, are now treated at the same 5.64 percent rate. States and private colleges may have their own rules for financial aid, and some states give more favorable treatment to pre-paid tuition plans and other college savings options.

Financial Aid Online Resources. Financial aid is a complex and confusing area. To help students and parents navigate the landscape, the U.S. Department of Education’s Office of Federal Student Aid launched Student Aid on the Web, a robust website that provides details on federal student aid programs, including grants, campus-based aid, work-study programs and loans. DOE also streamlined the process for applying for financial aid, enabling parents and students to submit the Free Application for Federal Student Aid (FAFSA) and monitor results online. The FAFSA website also features the FAFSA4caster tool, which estimates in advance how much aid your student qualifies for and how much the family might be expected to pay—referred to as the Expected Family Contribution (EFC). Another helpful website for understanding financial aid and determining eligibility is FinAid! The SmartStudent™ Guide to Financial Aid.

But remember that financial aid today is not a gift—about 34 percent of aid for 2007-2008 consisted of loans.1 While savings may decrease financial aid, you and your child will likely be in a much better financial situation on graduation day if you start saving for college now. The more you save now, the less you will need to borrow later.


1 Trends in Student Aid 2009, The College Board®.

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