Saving for College is Easier Than You Think

from daveramsey.com on 27 Oct 2009
 

Take a guess at how much the average debt a college senior graduated with in 2006. Perhaps a few thousand? Try $19,000. That's the average!

Almost 8% of graduating seniors in 2004 had $40,000 or more in student loans. That percentage has increased significantly since 1993, when only 1.3% of college seniors carried a debt that large.

According to an article by USA Today, part of the problem is the steep rise in tuition costs. "College costs have risen by more than 50% since 1990, but federal aid hasn't kept up. Congress hasn't increased the Pell Grant, the most common form of direct aid for low-income students, since 2003."

Because federal aid is so low, more and more college students are taking out private loans, which have higher interest rates. With the way things are going, college graduates will be lucky to have their loans paid off before their kids start college!

The Census Bureau estimates that college graduates earn $1 million more over their lifetime than their peers who only hold a high school diploma. This drives many college-bound students to take on large student loans to receive their education.

As a parent, you're probably thinking that there has to be another way. Well there is! It's not easy, but with focused dedication, hard work, and careful budgeting, it's possible to save enough so your child can go through college debt free!

The Best Ways to Save

Dave recommends saving for your children's college using tax-favored plans.
  1. Start an Education Savings Account (ESA) or Education IRA NOW! This allows you to save $2,000 (after tax) per year, per child. Plus, this grows tax free! If you start when your child is born and save $2,000 a year for 18 years, you would only invest $36,000. However, at 12% growth, your child could have $126,000 for college!
  2. 529 plans If you want to save more, or if you don't meet the income limits for an ESA, look for a 529 plan that allows you to control what funds are in the account. Dave does not recommend 529 plans that freeze your options or automatically changes your investments based on the age of your child.
  3. UTMA or UGMA (Uniform Transfer/Gift to Minors Act) plans These plans are not as good as other options available. The account is in the child's name but is controlled by a custodian (usually the parent or grandparent). This person is the manager until the child reaches age 21. At age 21 (age 18 for the UGMA), the control of the money goes to the child to use any way they choose.

Remember to never save for college with insurance, savings bonds, or pre-paid tuition. These are all rip-offs!

Dave's new college curriculum teaches students how to make their money work for them and avoid the sneaky credit traps. Learn more about the new class!

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