College Will Cost What?!

Three of my kids were in college at the same time, so I know what a tuition bill can look like! Paying for college can be a big undertaking and you might not know where to start. Do you just start saving money? The prices go up every year, so how much will you need? This 3 step-guide will point you to the answers you’re looking for so you can begin taking small steps toward your BIG GOALS for college!

1) Know Your Costs

It’s pretty easy to find out what college costs right now. Just call the school and ask! But if your child is not yet college age, you’ll have to estimate what costs will be when he or she is old enough to attend. To do this, you’ll need 3 things:

  1. Current Cost of College (You can go by an average, or if you have a specific school in mind, you can check their rates by looking online or calling an administrator)
  2. College Inflation Rate (This tells you how much the costs rise per year)
  3. The Age of Your Child  (This one might make you cry. They grow so fast!)

Let’s say little Jonny is 8 years old and you assume he’ll go to college when he turns 18. Here’s how you determine your costs. For current college costs, we’ll use some averages: 

  1. According to Forbes, the current (in 2016) average cost of college is as follows:
    • Public College - $28,000/yr
    • Private College - $59,000/yr
    • Elite College - $68,000/yr
    You want Jonny to attend a private college when he grows up, so your current cost = $59,000.

  2. Forbes also reports that college costs have been rising at roughly 7% average for decades.
    College Inflation Rate = 7%.
  3. Jonny is 8 years old and he’ll be leaving for college in 10 years (when he’s 18).

So let’s do some math! It looks hard at first, but it’s actually easy.

All we have to do is multiply $59,000 (current cost) times .07 (inflation rate) to know how much more college will cost next year.

$59,000 x .07 = $4,130 

College costs will rise about $4,130 by next year which means next year’s cost will be around $63,130.

But Jonny is only 8, so we need to know what the costs will be 10 years from now! We can either:

  1. Do the same math problem 9 more times, each time using the result of the previous problem. Here’s what that would look like…

    $63,130 (Next Yrs Cost) x .07 (inflation rate) = $4,419.10
    $63,130 + $4,419.10 = $67,549.10 is the cost 2 years from now.

    $67,549.10 (Cost in 2 years) x .07 (inflation rate) = $4,728.43
    $67,549.10 + $4,728.43 = $72,277.43 is the cost 3 years from now. 7 more years to go…

  2. Or we can take a shortcut. Praise the Lord for shortcuts!

    For the shortcut method, use the following math:

    (Current College Cost) x (1+Inflation Rate) ^ (years until college)

    The math might look hard, but if you just plug in the numbers, it’s not so bad. Here’s what it would look like:

    ($59,000) x (1 + .07) ^ (10)

    If you do the math, it works out like this:

    $59,000 x 1.07 10 = $116,061.93 (Cost for college 10 yrs from now)

    You might be thinking “WHAT?! That costs too much!!” but if costs continue as they have for decades, it could be a reality.

    Don’t give up on Jonny’s schooling just yet! The good news is, if he works hard, he may be able to get grants and scholarships to significantly reduce the cost of college. (We’ll get to this in a minute). But obviously, it’s still going to cost a “pretty penny.” So at TRADEway, my staff of registered investment advisors helps you learn how to prepare for the future. Remember, BIG GOALS, small steps.

    Now that you’ve taken the small step of learning what your costs will be, your next step could be to…

2) Look for Help!

After seeing the possible price of college, you may be tempted to give up on that BIG GOAL. But don’t let the price tag scare you. People often pay a whole lot less than the “sticker price” on a college education. This is because there are ways to get the costs down. Some of these ways can include:

Pre-Paid Tuition: 

Some people use the pre-paid tuition plans, I discussed above, to pay today’s prices as opposed to the prices they could face 10 years from now. To explore a pre-paid tuition plan further, contact your CPA or financial advisor. If you don’t have one, your bank may be able to help you.

Grants:

Grants are a form of financial assistance that comes free of charge. These are usually rewarded as a gift for those who need help in order to attend college. Sometimes these grants come from the U.S. Taxpayers and are usually awarded through a government assistance program. Often, grants are provided by the generous giving of alumni of the school you are considering. To apply for grants, contact the financial aid center at the college of your choice. 

Scholarships:

This is where Jonny can really contribute to his educational future. If he works hard, applying for scholarships could result in some major financial aid. Like grants, this is “free money” that is not expected to be repaid. The difference is, while grants are determined based on needs, scholarships are determined based on performance. So if Jonny performs well in school, getting good grades, and in public service, by volunteering and helping the community, he might get awarded some significant college funds to assist in the cost of higher education. To apply for these, make sure you have thorough transcripts and documents recording the work that Jonny has completed and contact the financial aid center at the school.

Sponsorships

These are provided by charitable donations of individuals or organizations in your community. Yep, sometimes people just want to help. Contacting key members of your community, like pastors of churches, community organizers, and even business owners, is a great way to find out if anyone wants to help you get college paid for. Usually, a sponsor wants to interview the child that they may be helping and they often want to see the plan of action for a kid’s educational future. So as Jonny begins to get a little older and begins to have an idea of what he wants to study, make sure he writes out his goals and his plan to reach them. These are the kinds of things that sponsors like to see.  When looking for a sponsor, it can be helpful to find people that have common interests with the student. For example, if Jonny wants to study engineering, it might be good to find a sponsor who is also an engineer or who owns an engineering firm. 

Getting help is great, but it probably won’t pay the entire bill, which means you need to start saving. So where do you start? Step 3 could help you with that…

3) Start a Savings Plan

There are different plans you can use for saving for college. Of course, how you save for college is your choice to make, but knowing what’s available can really help you in the decision process. Here are some plans that have helped some others save for college.

529 Plans:

These are state-run tax-deferred savings accounts specifically for higher-education savings. Plans can vary from state to state, but generally they fall under two types: Prepaid Tuition Plans & College Savings Plans. 

A Prepaid Tuition Plan is much like the name implies. The plan allows you to pay for a future student’s college tuition before they actually attend college. Like pre-ordering the next new smartphone, you pay now and enjoy the benefits later. The advantage is, you can purchase the future tuition credits at today’s rates. For example, if you purchase one year worth of tuition today, Jonny will be allowed to attend for one year of college 10 years from now, even if the costs have increased. What a discount! 

A College Savings Plan carries a little more risk, because it invests in the U.S. Stock Market. Think of it like an investment in a mutual fund where any profits are used for college expenses. The higher risk comes with a chance for higher returns. If the investments, in the College Savings Plan, go up, the account value could go way up as well. You may be able to invest a smaller amount in a College Savings Account and still pay for a pricey higher education!

Education Savings Accounts (ESAs):

These used to be known as “Education IRAs” so if you are familiar with IRAs, just know that these are similar. They, like college savings accounts, can be used to invest in the US Stock Market. ESAs can be used for more than just college. In some cases, they can be used to save for secondary learning or private education costs in K-12. When an account is setup for a student, usually there can be more than one person who puts money into it. So, if Aunt Becky wants to help out with Jonny’s education costs, she can make a donation to the account. There are donation limits however, and if too much is contributed, you could incur penalties. 

IRAs

Some people opt to use IRAs when saving for college. The benefit of an IRA is that it does not have to be used for any one specific thing like college. It can be used for other things as well so long as you follow the guidelines. IRAs are also used as an investment in the US Stock Market. Typically, people use them for mutual fund investing, but they can be used for other types of investing as well. There are several types of IRAs available. 

If you want to know more about the different ways you can save for college, or for anything else for that matter, you may want to talk with an investment advisor. My friends at TRADEway and I are all registered investment advisor representatives (IARs) that would love to get to know you and learn more about your BIG GOAL of saving for college.  To meet us, call 877.777.0703 or go to TRADEway.com to learn more.

Get Started!

Some of these plans work better if you have a working knowledge of investing. That’s why I started my investment advisory firm, TRADEway. We can teach you the ins and outs of investing.  It’s not nearly as hard to understand as most people think and it can actually be kind of fun! If you want to learn more, to help you save for college, give us a call. We have live learning events and people who care about seeing you succeed. We are one big family at TRADEway, you’re going to love us. Give us a call at 877.777.0703 or visit our website at TRADEway.com. If you prefer email, try support@TRADEway.com.

I hope this beginner’s guide to saving for college has been helpful in letting you know what is available to you. If you like it, feel free to share it with a friend and let me know if there is anything else we can do to help you reach your BIG GOALS, by taking small steps!