February 5, 2005 08:24 AM
Start Saving For College ASAP, If You Can
Excerpt: An earlier start also allows a more-aggressive investment strategy and the possibility of earning higher returns, just as delaying college savings means a more conservative stance. Over a shorter investment horizon, conservative investment returns are unlikely to keep pace with rising college costs.
According to Nellie Mae, a leading education-loan provider, the average undergraduate student loan debt in 2002 was $18,900 and rising fast. The trend toward higher tuition costs shows no signs of abating, and neither does the trend of increasing post-graduation indebtedness.
The magic of compounding and escalating college costs underscore the importance of starting a college fund early. But tight budgets and other priorities stand in the way of many families' establishing college savings for their newborns.
The benefits are the biggest for those that are able to start that early. A one-time $500 investment made today, earning an average annual return of 6 percent, increases almost threefold to $1,427 in 18 years. Waiting until your youngster is in third grade before making the same $500 investment will yield $895 by college enrollment. A $500 investment made for an eighth-grader will provide just $669 five years later.
As illustrated, a little bit of savings now goes a long way later. College costs are rising faster than inflation, and faster than the ability of most families to catch up to future costs by saving more later.
An earlier start also allows a more-aggressive investment strategy and the possibility of earning higher returns, just as delaying college savings means a more conservative stance. Over a shorter investment horizon, conservative investment returns are unlikely to keep pace with rising college costs.
The alternative to saving a little now is to save or borrow a lot more later. But saving for college when kids are young is particularly tough. Those are notoriously tight years financially for new parents as they're often the years of buying a first home or moving to a larger home in a more-expensive, family-friendly neighborhood with good schools. They're also the years of buying minivans and repaying student loans, not to mention monthly budget-busters such as formula, diapers and day care. The early years are also the years when one spouse is most likely to remain home or work a reduced schedule.
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