Your Mortgage, Your Money, Own Your Future

It’s the question every parent dreads. Although the answer hopefully is yes, you’ll have to plan ahead. Unless you are very well off financially, you can’t expect to sit on the sidelines for years and then suddenly find the funds to pay for college when your child is ready to go. The best thing to do is to start saving as early as possible, even if you’re able to save only a small amount at first.

How much will college cost in the future?

For the 2004/2005 academic year, the average annual cost of a four-year public college is $14,924 and the average annual cost of a four-year private college is $30,581. (Source: The College Board’s Trends in College Pricing Report 2004.) The total figures include five expense items: tuition and fees, room and board, books and supplies, transportation, and personal expenses.

It’s a likely bet that costs will continue to rise, but by how much? During the last few years, college costs increased at an average rate of about 5 to 6 percent each year as colleges tried to control escalating costs. But going forward for the next 10 years, college costs are expected to increase a bit more, about an average of 7 or 8 percent per year. (Source: FinAid, 2002 report on college inflation, based on figures provided by The College Board and the Bureau of Labor Statistics.)

How will I pay for it?

Many parents save less than 100 percent of their child’s education costs before college. Usually, they put aside enough money to make a down payment of sorts on the college bill. Then, at college time, parents can supplement this down payment by:

• Obtaining private loans (e.g., home equity loan, margin loan)
• Obtaining financial aid-related loans (e.g., PLUS loan)
• Tapping their own investments (e.g., mutual funds, 401(k) plan, IRA, cash value life insurance)
• Having their child apply for financial aid (e.g., student loans, grants, scholarships, work-study)
• Having their child contribute a portion of his or her savings and/or investments
• Having their child obtain a part-time job during college

How much should I save?

You’ll want to put aside as much money as possible in your child’s college fund. The more money you put aside now, the less you or your child will need to borrow later. Start by estimating your child’s costs for four years of college. Then decide how much of the bill you want to fund-100%, 75%, 50%, and so on. To meet your goal, you’ll need to use a financial calculator to determine how much to put in your college fund each month. Click below to calculate what it might cost to send your child to college.

College Funding Calculator

In many cases, the amount of money you should contribute really boils down to how much you can afford to contribute. Every situation is different. You’ll need to take a detailed look at your family’s finances in order to determine what you can afford to add to your child’s college fund each month.

Start a savings program as early as possible

Perhaps the most difficult time to start a college savings program is when your child is young. New parents face many financial strains that always seem to take over–the possible loss of one income, child-related spending, and the competing need to save for a house or car, or the demands of your own student loans. Yet this is the time when you should start saving.

With many years to go until your child starts college, you have time to select investments that have the potential to outpace college cost increases (but keep in mind that any investments that offer higher potential returns may involve greater risk of loss). In addition, you benefit from compounding, which is the process of earning additional funds on the interest and/or capital gains that your investment earns along the way. With regular investments spread over many years, you may be surprised at how much you may be able to accumulate in your child’s college fund.

But don’t feel bad if you can’t put aside hundreds of dollars a month right from the start. Start with a small amount, say $25 or $50 every month, and add to it whenever you can. You’ll have a head start, as well as peace of mind knowing you’re doing the best you can.

Now is also the time to speak to a Financial Planner who will help to answer all of your questions regarding saving for college, retirement and/or doing a major renovation on your home. We work with several exceptional Financial Planners and ask that you contact one or all to help you meet your financial goals.

Question:

Should I take out a home equity loan to pay for my child’s tuition?

Answer:

If you own a home and have equity in it, you may want to consider taking out a home equity loan as a source of funds for your child’s private school or college tuition. A home equity loan is secured by the equity you have built up in your home and can be structured as either a revolving line of credit or a second mortgage.

With a revolving line of credit, your lender establishes a credit limit that depends on the amount of equity you have built up in your home and your ability to make payments. You can then access as much money as you need (up to the maximum amount allowed) whenever you need it by writing a check or using a credit card.

Interest rates are variable and tied to the Prim Rate Index which is governed by the Federal Reserve Board. Your monthly payments will also vary, depending upon your outstanding balance.

If the home equity loan is structured as a second mortgage, you borrow a fixed amount (sometimes as much as 100% of the equity in your home) that is transferred to you in full at the time of the closing. You must then repay that amount over a fixed term, just like you do on your original mortgage.

The advantages of a home equity line of credit or a home equity loan include tax-deductible interest and, in most cases, a more favorable interest rate than credit card loans. Keep in mind, however, that a home equity loan puts your home at risk because it serves as collateral for the loan. In other words, your lender can foreclose on your home if you fail to repay the loan.

Before you take out a home equity loan, contact me to see if a home equity loan is the right choice for you.