The Best Investment to Start Saving for Your Child's College Tuition

One of the biggest issues for new, or relatively new, parents is how to pay for their child's future education. It is no secret that the cost of a collegiate education is skyrocketing. The average cost of tuition for four years at a public state university has risen to around fifty thousand dollars. For private schools, this number can exceed two hundred thousand dollars. With a rising percentage of students taking five or more years to graduate instead of the traditional four, this number can be increased by twenty percent or more. And these are 2011 prices - just imagine what they will be in 2029, when today's new children will be at college age! Parents have to prepare as if these costs will continue to rise.

Not long ago, saving for a child's education was a luxury more than a necessity. Students could always take out loans and pay for their own education, then pay it out over a few years after they get a job. In today's world, this leads to students being saddled with a ton of debt coming out into an uncertain job market. This is not an ideal scenario that any parent would want for their child. The ability to pay for an education straight up is more important now than ever before. As loan debts and interest rates on that debt rise over time, this becomes even more important.

So, how should parents save for this huge cost going forward? I am not about to make specific investment advice, especially in this economy. Rather, the best solution is to put a certain amount of money away from each pay check and invest it into safer investments for that have lower returns, but much less risky. This way the number not only will grow with monthly allotments, but the money will also compound on a regular basis growing on itself.

Not to venture into a finance lesson, but this is best displayed through a hypothetical scenario. We will start with the month of a child's birth. Let us assume a take home salary of $3000 per month. Let's put 5% of this ($150) into the college on a monthly basis. For the purposes of this study, we will ignore the possibility of any future raises or escalators. Obviously those would significantly help the contribution. We can put this money into a safe steady growth fund - for the purposes of this hypothetical, we will say 3% annually. This amounts to 0.25% per month.

I will not bore you with the financial equations, but after 1 year, this account will have grown to $1824 on a principal of $1800 monthly installments. Within 2 years, this account will have grown to $3705 (on a principal of $3600). Within 5 years, the investor will have almost $9700 on a principal of $9000. After 18 years have passed, this account will have accumulated almost $43000. Now, that is a pretty nice nest egg to apportion to your child's education. Obviously, if you contribute more or net a higher rate of return - this number will be significantly higher.

How do you intend to save for your child's college education? Or, even more expensive, medical school tuition? Here's an article on the rising numbers from Chicago Tribune. Learn more about financing here.

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Sallie Mae Offers Tuition Insurance: Buyer Beware!

Sallie Mae has recently added a tuition insurance plan to students and parents. The plan is offered in partnership with Next Generation Insurance Group. According to the NY Times, however, the plan reimburses at different rates for physical and mental health withdrawals from school.

While physical causes for withdrawal result in 100% tuition reimbursement, mental health withdrawals from school are only reimbursed at 75%, and often require a multiple day hospital stay. The irony is that mental health issues are most likely to be the reason a student will have to withdraw from school.

There are some underwriters who offer equal coverage for physical and mental illness withdrawal but Sallie Mae chose to partner with a provider who insists on disparate treatment.

Federal law now mandates equal coverage for mental and physical illness where employers offer insurance for mental health, however tuition insurance is only based on health, but is not actually health insurance and therefore doesn't fall within these rules against disparate treatment. According to Ken Libertoff, a Vermont consumer advocate, parents need to be aware that there is a fatal flaw in these plans.

Premiums for Sallie Mae's tuition plan can go as high as $599 for $50,000 of coverage. But students can get free insurance for $5,000 of coverage, and following the article in the NY Times, Sallie Mae started offering 100% mental health coverage to students who take the free coverage. One forgiving provision in Sallie Mae's coverage allows students to purchase the coverage even after the school year has begun, allowing a backdoor out for students whose mental health issues may be in check at the beginning of the year, and want to give school a try, only to realize that they're in over their heads, emotionally, and need to drop out for mental health reasons.

The coverage is generally not available for an illness that was "active" when the student enrolled in the school, however conditions such as anxiety or depression may be exempt from this disqualification even if being treated prior to enrollment. About 1,200 private schools offer some sort of tuition insurance, and many of those schools make it mandatory for new students. At most colleges, however, less than 10 percent of parents sign up for tuition insurance.

Whether Sallie Mae will equalize its coverage for both physical and mental health issues on all its tuition insurance policies remains to be seen.

Marcy Einhorn is a New York attorney and The Money Coach.

Marcy is available as a speaker for community organizations and business events, and also offers confidential, personal money coaching. Contact Marcy@nylifeordebt.com for more information.

http://www.nylifeordebt.com/

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