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.