Tuesday, October 26, 2010

Getting Your College Savings Plan in Shape

By John F. Wasik (Reuters)

A ‘pure’ savings plan for college can still work

A graduating senior waves as she arrives at the commencement for Barnard College, where U.S. Secretary of State Hillary Clinton spoke, in New York, May 18, 2009.  REUTERS/Chip East You can still put aside enough money for college if you save. Is this the latest American myth?

According to reader Bill H., a “pure” savings approach worked for his children. It also helped they were good students, obtained scholarships and went to state schools.

“When my kids were born I just started putting money away,” Bill tells me. “Mainly, I would save the entire paycheck from any outside income I had…I usually had about $3,000 a year in outside income.”

“I would also try to save about 10 percent from every regular pay check. My salary was not huge, probably averaged about $40,000 to $45,000 a year, but I was usually saving about $7,000 to $8,000 a year.”

Investing in insured certificates of deposit and conservative stock and bond mutual funds, Bill kept at it for 17 years, when he averaged about 7 percent annual return (good luck getting that today) and had accumulated $200,000. He then took the money out of the stock market five years ago and placed the money in insured CDs.

From the interest on his CDs (about $12,000), he was able to fund one daughter’s college payments, supplemented with other savings, her part-time work and a scholarship.

Is this a fairy tale? Bill says he’s able to save because he lives modestly in his Georgia community.

“I drive the same truck I’ve driven for 12 years; my wife has driven the same car for 10 years,” he says. “My kids worked and paid for their own cars. They have no bills other than house, insurance, utilities, clothing and food (about $1,700 monthly). Our biggest bill is taxes.”

As American families are scaling back plans to pay for their children’s college educations, Bill’s family stands out. They are habitual savers and neither of their two daughters will graduate with college debt.

According to a Gallup poll, on average, families have saved about $28,000 for college. Most have to go into debt to foot six-figure tuition bills.

Some of the college savings shortfall is due to family confusion over the best vehicles for college savings. Each state has its own “529” savings plan with multiple options. The Gallup poll showed that nearly half of those surveyed weren’t sure of the best college savings plan. Here are some good ways to get started:

* Don’t just explore your state’s 529 plan, you can choose from any state. I went out of state to invest in Vanguard’s Upromise plan because of the lower costs and conservative management. I wasn’t disappointed since my state (Illinois) had to police an errant bond-fund manager who lost money in mortgage securities.

* Any savings from lifestyle choices are worthwhile. Want to give up cable and save the difference? How about cutting back on your restaurant meals? Any savings can be banked.

* Put your spending to work for you. Both Upromise and Baby Mint, set aside a percentage of your spending with certain vendor and credit cards into college savings funds. I’ve been using Upromise for year and have saved thousand for my daughters.

* Don’t forget scholarships. Several neighbors of mine have negotiated with colleges for “tuition discounts” because their children were good students. Colleges always officially deny they do this, but they can cut their fees if you have other universities making offers.

The most-effective savings program is one that involves an all-out effort. It always surprises me how many ways you can accumulate college funds. You just have to be careful about your choices.

Photo: A graduating senior waves as she arrives at the commencement for Barnard College, where U.S. Secretary of State Hillary Clinton spoke, in New York, May 18, 2009. REUTERS/Chip East

John F. Wasik is the author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream

1 comment:

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