Creating a College Savings Plan

Saving for college can be a complex yet rewarding process for many families. Here are several important savings strategies to consider when creating a successful savings plan for college.

Start Saving as Early as Possible

While some families don’t begin thinking of college savings until their children are nearing their teenage years, others will start as early as birth. If you can afford it, begin saving as early as possible–not only will this greatly reduce the monthly or yearly amount you will need to contribute to a savings plan, but it will also allow you more opportunities to take advantage of compounding interest rates in various investing strategies.

An 18-year savings plan can take advantage of the stock market and bond market, both of which offer dividends competitive with the rate of inflation and the rate of college tuition inflation. In contrast, if you begin saving closer to the time when the money will be needed for tuition, these investing strategies might be too risky, and you might be forced into investing outlets that pay lower interest, such as money market accounts or certificates of deposit (CDs). For parents who start saving early, gradually transitioning into more conservative accounts will be beneficial in minimizing risk nearer to the time of college.

Understand the Financial Aid System

Federal, state, corporate, and other private financial aid programs should all be considered when creating a plan to make a successful budget for college. Many families cannot afford to pay the full tuition out of pocket, and for these families there is a vast array of financial aid opportunities. Some of these are scholarship grants, while others are subsidized or low-interest loans for parents and students. Students should not rely on grant scholarships or merit-based aid in drafting a college budget, as these programs are very competitive and not always available, but they should definitely apply to as many as possible.

Need-based aid, however, is something that can be anticipated and set into a budgeting plan. Parents should thoroughly review the policies for federal need-based aid and form their savings strategies to maximize the likelihood of receiving aid. This frequently involves contributing the maximum amount of money into retirement accounts before beginning savings accounts for college. Although this may seem counterintuitive, as the goal is to pay for college, this strategy can actually be helpful for many families, because any money in retirement accounts is not considered available savings by many aid programs. Moreover, this money can be taken out (with a penalty) when absolutely needed for potential college payments. Saving in the parents’ names, rather than the students’ names, also increases the likelihood of receiving need-based aid, as a larger percentage of student savings are considered eligible to pay for college when compared with parent savings.

Consider Future Educational Expenses

Students and parents should also consider the likelihood of future educational expenses, such as masters programs, law school, medical school, or other graduate school programs. While some Ph.D. programs offer stipends to their students, other programs like law and medical school have tuition rates that are even higher than college. If possible, saving extra money for these graduate programs is a good idea, as is continuing to maximize the chances of any potential need-based or merit-based aid. Unfortunately, the number of scholarships for graduate programs is much lower than for college, so students pursuing graduate degrees should consider taking out educational loans to cover expenses. Generally, it’s a good rule to accept federal loans first before moving into private loans, as federal loans usually have lower, fixed interest rates.

Overall, beginning a plan to make a successful budget for college should start early, attempt to maximize need-based aid, and leave room for any postgraduate educational programs.