Saving for College with Compounding |
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Don't be daunted by the amount you may have to save. Small amounts of money, if invested early, can become sizable investments through the remarkable power of compounding. For example, if you save $200 a month at an 8% annual rate of return for your newborn child, you will have over $96,000 for college when she turns 18. Use our College Savings Calculator to see how early and regular saving can make your money grow.
Use our College Savings Calculator to estimate the amount of money to invest each year to cover your child's college education. Remember to factor tuition, room, board and books into your calculation. If you know where you want your child to go to college, but don't know the current costs, you can use the National Center for Education Statistics' school locator to research the costs. If you are unsure where you want your child to go to college, The College Board® says a year at a private four-year college, for tuition, room and board, now averages $32,307 and the same year at a public four-year college averages $13,589.
Financial Aid and Savings
As part of saving for college, you need to know whether your child will be eligible for financial aid, which reduces what you may need to save for college.
 You also should be aware, however, that saving for college might impact financial aid. In fact, any investments or savings can affect federal financial aid eligibility. The impact on financial aid varies depending on whether the savings belong to the parent or the child. Now, savings in a parent's name can reduce federal financial aid eligibility by at most 6%. But assets saved in a child's name can reduce aid eligibility by 35%. States and private colleges may have their own rules for financial aid, and some states give more favorable treatment to pre-paid tuition plans and other college savings options. |
Financial aid is a complex and confusing area. A very helpful Web site for understanding financial aid is FinAid! The SmartStudent Guide to Financial Aid. It even has a financial aid eligibility calculator to help you calculate the amount of money you will have to contribute to pay for college and the potential aid for which you may be eligible.
But remember that financial aid today is not a gift—about 52% of aid for 2006-2007 consisted of loans.2 While savings may decrease financial aid, you and your child will likely be in a much better financial situation on graduation day if you start saving for college now. The more you save now, the less you will need to borrow later.
2 Source: Trends in Student Aid 2007, The College Board®.
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