QUESTION: It seems there are a number of misconceptions about the costs of a college education and the best ways to save for those expenses. Can you shed some insights on the financial planning of college financing?
ANSWER: Paying for college education can be a daunting and challenging experience for many American families, especially because tuition continues to increase more quickly than the rate of inflation, according to CNN Money. Last year, public university costs rose 7.8 percent; prices at private universities increased 5.6 percent.
While rising rates are a concern, the reality for many families may not be as bad as you might think. Here are some common myths and misconceptions about paying for college.
Myth No. 1 -- The $100,000 tuition: For public colleges, total tuition expenses for the 2004-05 school year averaged $11,354 last year, while tuition at private universities averaged more than $27,000, according to The College Board's recent report "Trends in Student Aid 2004." However, those numbers can be deceiving because three out of four undergraduates attended schools where tuition averaged less than $12,000-a-year. The $25,000-a-year tuition is the exception, not the rule.
More than half of students paid less than $6,000 for tuition last year. Although, those costs were for public colleges, CNN Money reports that prices for many private universities also fell well below six-figures for four years.
Myth No. 2 -- The return on investment is not what it used to be: You might be worried that after your children graduate, between paying back school loans and starting their careers, they might "just get by" financially. Don't be disillusioned; the money spent on a college degree still yields a sizable return on your investment.
In fact, CNN Money reports that typical college students earn about 75 percent more than someone with only a high school diploma over a working lifetime.
Myth No. 3 -- No financial aid if you earn too much: Half of the families earning more than $80,000 per year qualified for financial assistance last year, according to CNN Money. The likelihood of receiving financial assistance increases when students attend a more expensive college or if a family has more than one child in college at the same time.
While the popular belief is that financial aid assistance is decreasing for most families, it actuality is increasing. During the 2003-2004 academic year, financial aid increased 13 percent from $108 billion to $122 billion with the average full-time student receiving $10,472 last year.
Myth No. 4 -- The more you save, the less financial aid you get: The truth is, the more you save, the less likely you will need to borrow to pay for college.
Here are some suggestions that may help you save for your child's education:
-- College savings plans: There are many college savings plans, but the two most common plans are the Coverdell Education Savings Account, or ESA, and the 529 College Savings Plans. There are some distinct differences between them, including their contribution limits.
For example, an ESA has an annual contribution limit of $2,000 per student, while a 529 has very high contribution limits, in some cases up to $200,000. Both the 529 and the ESA let investments grow tax-free until money is withdrawn. Because anyone can save for a beneficiary, including grandparents, siblings and other relatives, many people can chip in to pay for one student's college education.
Remember to keep the 529 plan in your name, not your child's, because financial aid formulas count 5.6 percent of parental assets versus as much as 35 percent of money saved in the student's name.
-- U.S. savings bonds: Consider pulling out the U.S. savings bonds you received as gifts when your child was born and cashing them in to help pay the college bills. Depending on your income level and other circumstances, you may not have to pay federal tax on the bond's interest as an additional bonus when used for higher education costs. Or you can deposit the cash from the savings bonds -- while preserving the tax-free benefit -- into your child's ESA or a qualified 529 Plan.
-- Federal and state college financial aid programs: When it comes to financial aid, countless options are available from federal programs such as Pell Grants, which are awarded based on student needs, or Stafford Student Loans, which are federally subsidized loans.
Families with high incomes also are eligible for the program if certain need tests are satisfied. Individual states offer assistance but most states grant aid only to state residents attending schools within their state.
-- Seek help: You can learn about financial assistance programs from your child's high school guidance office.
John Gin is a certified financial planner in the New Orleans-area office of a national financial services firm. Questions about money, credit or investments can be sent to Money Watch, The Times-Picayune, 3800 Howard Ave., New Orleans, LA 70125