Dos and Don'ts: Student loans

Parents should get economy money early for their children's college instruction because of the high costs and outlooks that parents will pay portion of the costs associated with the education. Respective stock common finances are recommended.

Here's a inquiry that's arsenic pleasant to see as a fraternity hazing: How will you come up up with the money to direct your kid to the campus of his or her choice? If you're wish most Americans, your reply is probably loans--unless you begin saving and investment more effectively. According to a recent MONEY poll, fully 87% of U.S. mas and dadas anticipate their children to travel to college. But nearly half of them, 47%, have got not yet stashed away any money to cover the costs, which currently run an average of $7,118 a twelvemonth for tuition, fees, room and board at four-year public schools and $18,184 at private universities, according to the College Board. And at the current growing rate of 5% A year, the cost of a four-year degree is projected to lift to $73,834 (public) and $188,620 (private) for a kid born in 1997.

The study of 1,118 grownups with children, conducted by ICR of Media, Pa. (margin of error: plus or subtraction 2.9 percentage points), also supplies a wake-up call for parents who state they are saving for their kids' college costs. More than one-half hoard their nest egg in unwise college investments, such as as certifications of deposit. And nearly a one-fourth of parents who are saving are putting away a negligible $500 Oregon less a twelvemonth for each child.

Yes, your kid can decrease your load by working portion clip and by pursuing scholarships (see "Strategies That Can Cut Costs 30% or More" on page 126). But financial experts state that the average parent should be prepared to pick up at least a 3rd of entire college costs.

If your kid is in high school and you haven't saved enough, check out our advice on page 138 on borrowing for college. If your children are younger, however, the sooner you begin to save, the better. For example, Richard and Deborah Winters of Milford, Conn. (pictured at left) began putting away col- lege money for boy Kyle, 4, when he was six calendar months old and for girl Kar- lie, 2, when she was 1 1/2. Oakland registered nurse Iris Winn (pictured on page 139), a late starter, now hoards a humongous $12,000 of her $70,000 annual wage into college nest egg for her girl Monique, 15.

But whenever you begin your nest egg regimen, you can maximise your dollars by planning and investment wisely. Later in this article, we suggest investing strategies for households with college-bound children. But before you get to the specific advice, survey these basic rules--the DOS and don'ts of smart invest- ing for college:

--Do put household goals. You must first calculate out how much you need to carve out of today's disbursement for tomorrow's college costs. To do this, you can utilize the nest egg calculators included in popular software such as as Quicken, online services like MONEY's college nest egg calculator (http://www.pathfinder .com/cgi-bin/Money/collsave.cgi) Oregon free worksheets offered by brokerages and common monetary fund companies, including Prince Charles Schwab (800-435-4000) and Fidelity (800-544-8888).

"Parents and children should work together to make certain they are focused on the same goal," states Jesse James Pearman of Fee-Only Financial Planning in Roanoke. "That way, you can confront tough inquiries early on--for example, what to make if you are planning to pay for 75% of tuition at an in-state public school and your kid desires to travel to Harvard."

--Do start economy early. Every year, as your investing principal grows, so make the earnings on your money. The lesson is simple: Don't set off investing.

--Do put in stock common funds. According to the MONEY poll, parents saving for college have got plowed 53% of their instruction investings into low-risk--but low-interest--CDs and nest egg accounts at banks and money-market common funds. The parents have got invested only 23% of their money in pillory and stock funds. That's a serious mistake. While pillory carry some risk, they are your best stake for making your money turn over five old age or more. Since 1926, pillory have got gained an average of about 11% A year, more than than any other type of investment. Moreover, you can't number on bank account and cadmium outputs to maintain gait with tuition hikes.

The safest, easiest and most under control manner to put in equities is through common funds. Not only do finances offer variegation but many volition also relinquish initial investing minimums if you make automatic sedimentations every month, typically as small as $50 or $100. To avoid having any money siphoned off in commissions, stick with no-load funds like the 1s we name in this article.

--Don't disregard economy for retirement. Planning for your child's instruction should not stray you from making regular parts to your ain 401(k), individual retirement account or similar tax-deferred retirement account. You simply don't desire to lose the opportunity to do the most of the tax-deferred gains available in such as accounts. And retirement assets won't impact your eligibility for federal need-based college financial aid.

--Don't put in esoterica. From clip to time, you may meet sales pitches encouraging you to salvage for college with investings such as as rentes or cash-value life insurance. Both postpone taxes on your investing earnings but at the terms of costly backdown rules. Many postponed annuities, for example, charge punishments of 7% Oregon more than if you need to take out money within seven old age of making your investment. Tempted to purchase zero-coupon Treasury bonds, which recently yielded 6.6%? They can be mulct investments--as long as you purchase 1s that volition be redeemed when you need the money. If you have got got to sell a nothing before maturity, you may lose chief if interest rates have risen since you bought it. Prepaid-tuition plans, another manner of edifice up college savings, can do sense if you're too nervous to set in pillory (see the box opposite).

--Don't put your money in your child's name if you trust to get financial aid. College financial assistance expressions generally necessitate a kid to lend 35% of his or her assets toward costs, but parents typically need to set up no more than than 5.6% of their savings.

With those basic DOS and don'ts astatine the bosom of your investing strategy, here are moves to make, based on your kid's age:

If your child is 13 or younger, you have got enough clip to endure any short-term banal market squalls. Investing strategists therefore urge that you set 75% to 100% of your college nest egg in stock funds, depending on how much hazard you can tolerate, and the remainder in such as fixed-income investings as chemical bonds and chemical bond common funds. You might begin your nest egg programme with a monetary fund that throws shares of large and mid-size companies with consistent earnings additions and strong growing potential. Financial contriver Michael Zabalaoui at Resource Management in Metairie, La. suggests Oakmark (up an average of 25.13% annually for the three old age that ended June 30; 800-625-6275). Pearman urges Vanguard Index Value (up 25.46%; 800-851-4999). Both finances seek out undervalued equities and bear below-average risk, according to fund ranker Morningstar.

After you have got accumulated $5,000 in your starter motor portfolio, you can travel as much as a 3rd of your retentions into small-company and international stock funds, which offer the prospect of juicier tax returns but also carry greater risk. For finances specializing in shares of small companies, Zabalaoui prefers Berger Small Cap Value (up 22.6%; 800-333-1001). Among international funds, he wishes Janus Worldwide (up 24.7%; 800-525-8983).

If your kid is 14 or older, reduce hazard to safeguard savings. Zabalaoui urges getting at least 50% of your money out of pillory by the end of your child's fresher twelvemonth and moving all of your college nest egg for that kid into short-term bonds, fixed income and cash by the end of her sophomore year. To maintain hazard low, most investing experts order short- and inter- mediate-term chemical bond funds, which will add more than dad to your sum tax return than CDs or U.S. Savings Bonds. Pearman wishes Vanguard Chemical Bond Index Intermediate-Term (up 8.62%; 800-851-4999). The monetary fund shuns high-risk enslaveds and have an extremely low annual disbursal ratio of about 0.2% of principal, enabling more than nest egg to travel toward your child's college costs.