B.E. guide to college financing

Black Enterprise, Jan, 2001 by Carolyn M. Brown

How to fund your kid's college education from cradle to sheepskin

WHEN JAMES AND MARVIA SAWYER OF GAITHERSBURG, Maryland, found out, they were expecting their first child two years ago, their minds were on more than furnishing a nursery and buying baby clothes. The 30-something couple were thinking about getting a head start on their child's college education.

At 22 months, Quest Janae Sawyer is fond of Sesame Street's Elmo. Better still. thanks to her parents, she's cozy with a sound investment plan. The Sawyers opened an Education IRA when Quest was 2 months old, contributing $500 (the maximum allowed for a calendar year). Although the Education IRA met their initial objective of earmarking funds for Quest's college education, the Sawyers wanted to do more.

"At this stage in Quest's life, we can afford to be more aggressive now, while there's time to recover from any potential losses and still be prepared for college," explains James.

Taking the advice of a financial planner, they increased their contributions to three growth mutual funds--investing a total of $450 monthly. They are committed to not touching the funds for at least a decade; the savings may be used to cover other educational experiences, such as study abroad or music camp. "We don't want to limit Quest in any way. Whatever her aspirations, we want co have the financial means to support them," says Marvia, an education and development specialist with State Farm Insurance Co.

Married for five years, the Sawyers have agreed to sacrifice and save now so that they won't have to play catch-up in the years ahead. Like many concerned parents, they realize that the cost of higher education will continue to escalate--on average, an increase of 7% a year--and much of that burden will fall on their shoulders. Four years at Morgan State University, for example, could cost $50,000 when Quest goes to college. Moreover, the Sawyers want to spare their child the drudgery of paying back student loans for more than 10 years.

"There are so many ways for students to finance their education, including scholarships, loans, work-study, summer jobs, part-time jobs during college, and Pell Grants for the financially disadvantaged," says Gaston Caperton, president of the College Board, the New York City-based nonprofit educational association. "But it is critical for families to plan ahead and save whatever they can for their children's higher education."

Adhering to a disciplined plan is indeed the best way to lighten the load for both parents and students. Whether your child is 14 months or 14 years old, here's a complete guide to financing a college education.

Compound Interest at Work

The sooner you start to save for college the better. The following table shows how $100 a month would accumulate at different rates of returns and time periods.

                    7%         10%         12%

Year 1         $ 1,245     $ 1,267     $ 1,281
Year 2           2,580       2,670       2,725
Year 3           4,020       4,215       4,350
Year 4           5,550       5,920       6,185
Year 5           7,200       7,810       8,250
Year 10         17,410      20,655      23,235
Year 15         31,880      41,790      50,460
Year 20         52,400      76,570      99,910

Source: Don't Miss Out: The Ambitious Student's Guide to Financial Aid, Octameron Associates, 2000

savings and investments

An annual increase of 7% a year in tuition costs translates into a doubling every 10 years of the typical bill for college. While you may not be able to save up enough money to pay for all four years, you should save as much as you can afford. A practical goal may be to try to save enough to cover half the cost of college.

Bear in mind that not all colleges cost $25,000 a year. In fact, 37% of all undergraduate students go to public two-year colleges, where annual tuition averages about $1,705, according to the College Board. Another 41% attend state universities, where annual tuition averages $3,510; room and board is an additional $4,060. Those attending a private institution are paying on average $16,332 for tuition; tack on another $6,209 for room and board.

If you have access to the Net, sites such as www.financecenter.com offer free calculators to help you figure out how much you need to save to meet your needs. In general, start by saving at least $100 a month, and increase that amount as time goes by. Over 10 years, at a rate of return of 12% (from the stock market), your contribution--$1,200 a year--would grow to $23,235.

Are you tight on money or short on time? With college only 12 to 24 months away, put all of your extra cash into a college savings account--tax refunds, year-end bonuses, and cash gifts from relatives--advise Anna and Robert Leider, authors of Don't Miss Out: The Ambitious Student's Guide to Financial Aid (Octameron Associates, $10). You may have to skip a family vacation one year, a savings of about $2,000, or keep an older car for an extra two years, which might save you $300 a month (for 24 months) in new-car payments, the Leiders add.