Parents should begin saving money early for their children's college education because of
high costs and expectations that parents will pay part of costs associated with education. Several stock mutual funds are recommended.Here's a question that's as pleasant to consider as a fraternity hazing: How will you come up with money to send your child to campus of his or her choice? If you're like most Americans, your answer is probably loans--unless you start saving and investing more effectively. According to a recent MONEY poll, fully 87% of U.S. moms and dads expect their kids to go to college. But nearly half of them, 47%, have not yet stashed away any money to cover costs, which currently run an average of $7,118 a year for tuition, fees, room and board at four-year public schools and $18,184 at private universities, according to College Board. And at current growth rate of 5% a year, cost of a four-year degree is projected to rise to $73,834 (public) and $188,620 (private) for a child born in 1997.
The survey of 1,118 adults with children, conducted by ICR of Media, Pa. (margin of error: plus or minus 2.9 percentage points), also provides a wake-up call for parents who say they are saving for their kids' college costs. More than half stash their savings in unwise college investments, such as certificates of deposit. And nearly a quarter of parents who are saving are putting away a paltry $500 or less a year for each child.
Yes, your child can lessen your burden by working part time and by pursuing scholarships (see "Strategies That Can Cut Costs 30% or More" on page 126). But financial experts say that average parent should be prepared to pick up at least a third of total college costs.
If your child is in high school and you haven't saved enough, check out our advice on page 138 on borrowing for college. If your children are younger, however, sooner you start to save, better. For example, Richard and Deborah Winters of Milford, Conn. (pictured at left) began putting away col- lege money for son Kyle, 4, when he was six months old and for daughter Kar- lie, 2, when she was 1 1/2. Oakland registered nurse Iris Winn (pictured on page 139), a late starter, now stashes a whopping $12,000 of her $70,000 annual salary into college savings for her daughter Monique, 15.
But whenever you start your savings regimen, you can maximize your dollars by planning and investing wisely. Later in this article, we suggest investment strategies for families with college-bound children. But before you get to specific advice, study these basic rules--the dos and don'ts of smart invest- ing for college:
--Do set family goals. You must first figure out how much you need to carve out of today's spending for tomorrow's college costs. To do this, you can use savings calculators included in popular software such as Quicken, online services like MONEY's college savings calculator (http://www.pathfinder .com/cgi-bin/Money/collsave.cgi) or free worksheets offered by brokerages and mutual fund companies, including Charles Schwab (800-435-4000) and Fidelity (800-544-8888).
"Parents and children should work together to make sure they are focused on same goal," says James Pearman of Fee-Only Financial Planning in Roanoke. "That way, you can face tough questions early on--for example, what to do if you are planning to pay for 75% of tuition at an in-state public school and your child wants to go to Harvard."
--Do start saving early. Every year, as your investment principal grows, so do earnings on your money. The lesson is simple: Don't put off investing.
--Do invest in stock mutual funds. According to MONEY poll, parents saving for college have plowed 53% of their education investments into low-risk--but low-interest--CDs and savings accounts at banks and money-market mutual funds. The parents have invested only 23% of their money in stocks and stock funds. That's a serious mistake. While stocks carry some risk, they are your best bet for making your money grow over five years or more. Since 1926, stocks have gained an average of about 11% a year, more than any other type of investment. Moreover, you can't count on bank account and CD yields to keep pace with tuition hikes.
