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Planning and paying for college: Some of your options
While many children are dreaming about what they want to be when they grow up, many of their parents are worried about how they'll eventually pay for those aspirations.
If current projections about the cost of college are correct (five percent increases per year), the cost of college could double by double by 2033, according to research by J.P. Morgan Asset Management and The College Board. Annual tuition at private colleges and universities will likely top $102,000 while public institutions will cost more than $45,000. According to J.P. Morgan Asset Management's most recent College Planning Essentials Guide, 59 percent of parents are not confident about meeting college costs. A few reasons why: not having a plan, starting too late and underestimating costs.
These figures are sobering for families of all income levels, but rising tuition is hardly a new trend. Data from the U.S. Bureau of Labor Statistics shows the cost of education has outpaced the rate of inflation by five and a half times since 1980.
Writing that check is daunting, but not impossible. If you start saving when your children are young and stick with your program, you may well be able to send your children to college without financial aid. You might even have money left over for graduate school.
One way to get there, a 529 Plan.
Congress initiated tax-incentivized savings programs for college tuition in 1996 under section 529 of the U.S. tax code. These are savings vehicles which allow after tax contributions to accrue free of tax in order to fund college costs, including tuition, fees, room and board.
On average, parents with a 529 plan save 89 percent more than those simply using a savings account, according to J.P. Morgan Asset Management.
Assuming $250,000 of family income and joint filing status, plus consistent monthly contributions of $500 earning 5% annually in New York's Direct 529 Plan, our sample college nest egg totaled $195,582 after 22 years.
In other words, you may be able to afford those costs if you start saving now. THAT's peace of mind. Granted, $500 per month is significant, but it's also manageable. The much harder position is waking up one day when your kids are in high school and recognizing you've saved nothing. At that point, you'd better get aggressive. Cut costs elsewhere and maximize your contributions. Even if it's only for three of four years, the amount might still cover at least freshman year.
While your undergrad may receive some form of aid, it's important to remember that 34 percent of all aid comes in the form of loans that must be paid back with interest. While financial aid can help pay for college, not all aid is free, and not everyone qualifies.
The key is that paying for college is often a mixture of aid, borrowing, saving and investing.
Michael Conrath, 529 Program Director at J.P. Morgan Asset Management, says it all starts with a plan. "As a rule of thumb, I think it's always better to invest and earn interest, than to borrow and have to pay interest."
If you haven't put your plan together, don't worry, there's always time to speak with an advisor to find a strategy that works for you. So when your 18-year-old calls during their first semester looking for a little pocket money, you'll be able to cover it.
Adam Johnson is a former Bloomberg Television anchor and investment manager. He currently runs a media advisory firm connecting CEOs and investors. He earned his economics degree from Princeton.