June 11, 2013
By Debra Taylor
Union Bank, N.A.
Senior Vice President and Regional Manager
Saving for a college education is an investment for the future, whether it is for your child, your spouse or yourself. With the rising costs of tuition, books, room and board, an in-state college education can run tens of thousands of dollars each year, and private colleges and universities are often double that.
According to a report by the College Board, the non-profit organization that administers the SAT college entrance exam, over the last decade, in-state tuition and fees increased at an annual rate of 5.6 percent beyond general inflation, a more rapid rate of growth than in either of the two preceding decades.
Having a financial plan in place and knowledge about resources and savings options can help make a college education more attainable.
Prioritize your financial goals
Saving for a college education is an investment, but most financial advisors will warn against sacrificing your retirement savings to pay for college. If college savings come up short, consider a student loan, financial aid, or even additional work to help pay the way.
Determine how much to save
Coming up with the dollar figure that you will need to save for a college education varies widely depending on the type of school (private or public, four-year or two-year, in-state or out-of-state) and the indirect costs that will be incurred while in school for books, housing, food, etc. The College Board provides a college cost calculator on their Web site to help parents and students project how much they can expect to spend pursuing their degree. For this and other resources, visit www.collegeboard.org.
Start saving now
Establish a budget that includes regular contributions to a college savings account and set up automatic deposits to that account. Even modest savings, when given enough time to grow, can add up with the benefit of compounding returns. Investing just $100 a month for 18 years will yield $48,000 (assuming an 8 percent average annual return). While this may not cover all college expenses, it is a nice start.
Consider your options
There are a variety of savings account options for you to choose from, each offering different advantages, depending on your situation.
A certificate of deposit (or CD) allows you to invest a fixed sum of money for a fixed term. In return for your deposit, the bank guarantees an interest rate – usually higher than a checking or savings account, but there are usually fees or penalties for early withdrawal of funds.
If you need quicker access to your savings, a money-market deposit or savings account allows access to your money at any time after opening the account. The interest paid is generally higher than a regular checking account because the minimum deposit requirement is typically higher.
A 529 college savings plan allows for tax-deferred growth and tax-exempt withdrawals to save for a college education. These state-sponsored plans also allow grandparents and other relatives to contribute and enjoy the tax benefits.
US Savings Bonds (Series EE or I) are available in small denominations and can be purchased for as little as $25 each. Savings bonds may be used to pay for qualified tuition expenses, but not room, board or books.
With the cost of higher education rising faster than inflation, investing in stocks and mutual funds may provide a favorable return if you plan on using the funds for college several years in the future. As it gets closer to the time you plan on paying for college, it may be wise to shelter your returns by investing money into bonds and cash.
You may find it helpful to discuss these options with a trusted financial advisor who can help further explore the fees, potential returns, and tax advantages each has to offer.
Understand financial aid
According to the College Board, most full-time college students receive some form of financial aid, such as grants or loans, to help pay for their education. Though low-interest student loans can help close the gap if you haven’t saved enough, paying even small amounts of interest can add up considerably in the long run. Every dollar in a savings account earning interest is a dollar less that has to be borrowed, and will help your student graduate college with a fresh financial start.
The foregoing article is intended to provide general information about saving for college and is not considered financial or tax advice from Union Bank. Please consult your financial advisor.
Debra Taylor a senior vice president and regional manager for Union Bank, N.A.,a full-service commercial bank providing an array of financial services to individuals, small businesses, middle-market companies, and major corporations. The bank operated 443 branches in California, Washington, Oregon, Texas, Illinois, and New York as well as two international offices, on March 31, 2013. UnionBanCal Corporation is a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd., which is a subsidiary of Mitsubishi UFJ Financial Group, Inc. Union Bank is a proud member of the Mitsubishi UFJ Financial Group (MUFG, NYSE:MTU), one of the world's largest financial organizations. Visit www.unionbank.com for more information.