Planning Your Child's Future
In a very real sense, financing your children's college education is like buying a home--there are several ways to pay for it: save, pay as you go, borrow, let someone else pay or a combination of these. All of these options can play a part in making the college dream come true. Planning is the key--and the time to begin is now.
Families should begin planning for postsecondary education long before that education actually begins. Even though financial planning is very personal, professional advice is often needed.
Getting Professional Advice
A professional financial planner can help you design a college savings plan that considers other family priorities like retirement savings and tax implications. If you seek such advice:
Be sure the financial planner you choose is licensed List of Savings Options
Ask friends for recommendations, then interview prospective choices and get references
Ask about the financial planner's level of education, professional experience, business affiliations, etc.
Determine whether the financial planner specializes in college savings planning
Agree on terms for payment before proceeding
Whether you devise a college savings plan on your own or with the advice of a professional financial planner, there are many investment options available through local banks, savings and loans, credit unions, full service brokers, discount brokers, insurance companies and mutual fund companies.
Passbook Savings Accounts - Simple to start, easy to use, this traditional savings method allows you to invest at your own pace. Many people find the convenience of automatic deposit a good way to reinforce their own savings discipline. Interest rates vary; shop around to find the best place for your account. Ready access to your money can be a mixed blessing: be aware of the temptations to "borrow" from a college savings account in other than extreme circumstances.
U.S. Savings Bonds - The familiar EE-bonds are guaranteed by the government and are virtually risk-free. They are available for as little as $25, often through payroll deduction plans, and never have a purchase or redemption charge. The interest rate paid on these bonds adjusts every six months in relation to the yield on federal five-year Treasury bonds. Interest is paid at redemption; for EE-bonds purchased after 1989, within income limits, interest used for college expenses is free from federal tax.
Certificates of Deposit (CDs) - These are short-term investments, usually available without purchase fees or service charges, that guarantee a specific return at a specific time. Because CDs are federally insured, they are very low-risk investments. However, investors also usually pay significant penalties for withdrawing funds before the maturity date.
Mutual Funds - Investors' dollars are pooled to purchase a diversified collection of stocks and bonds (security portfolio) managed by financial professionals. The investment objectives of mutual funds are outlined in their prospectus, and range from high-risk speculation to lower-risk managed growth. Mutual funds are evaluated annually in several popular financial magazines.
Common Stock - Ranging from very high risk "speculative" investments to lower risk "blue chip" issues, common stock offers potential income from both capital appreciation and dividend yield. Stock brokerage commissions vary widely between firms. Any stock can lose as well as gain value; investors should acknowledge their own level of comfort with that risk prior to purchase.
Corporate and Municipal Bonds - These fixed-income investments pay a predetermined rate of interest periodically and return principal at the maturity date. Bonds are rated by the financial markets; selecting bonds with high ratings that mature within seven years will minimize your risk.
Tax-deferred Annuities - Investors deposit a lump sum with an insurance company and accumulate interest at a competitive fixed or variable rate.
Variable Life Insurance - The investor's premium is professionally managed to purchase stocks, bonds, money market portfolios, or other investments.
Zero-Coupon Bonds - Instead of paying periodic interest, these bonds offer a fixed cash payment at maturity. The State of Illinois offers college savings bonds that are zero-coupon bonds.
ICAN (Illinois College Accounts Network) - A State of Illinois savings and investment program, ICAN is an account which can be opened for as little as $50 per month. ICAN offers exemptions from Illinois state tax on some earnings. For information call 1-800-242-ICAN (4226).
Other Options - Even if you don't own it outright, your home may provide another source of funds for education financing through a loan or line of credit based on home equity; interest rates are competitive and the interest is tax deductible. Such loans may be a good choice, particularly if property in your area is expected to appreciate in value.
Prepaying a mortgage can be an excellent investment. Paying an additional $200 per month on a $100,000, 30-year, 11% fixed-rate mortgage will pay off the loan in 15.5 years and save $142,391 of interest. Without the mortgage payment, the family may have more disposable income to use towards college expenses, and the value of the home (equity) is not currently considered in the calculation for determining the student's federal and state financial aid eligibility.
State and federal financial aid programs have changed dramatically in the last few years, but national policy still reflects a strong commitment to provide financial assistance to college-bound students whose personal resources cannot meet all educational expenses. The family's contribution toward that student's expenses is assessed through an application process established by Congress.