College Money Management

Money Management For College Students

After spending a great deal of time researching and crunching the numbers, we stand by these college money management techniques and we use them.

Bottom line, when it comes to money management for college students, we're confident our two little girls and your children will benefit greatly from this information.

College Money Management Overview

Some people see the price tag of a college degree and they freeze up and do nothing. Sometimes they put their hopes in having their kid earn a scholarship or put off investing for another year. You don't need to fall for this trap.

The sooner you begin working on your college money management, the more money you'll save with your college investment costs because you'll be putting "time and the compounding of money" on your side. Time and compounding will enable your money to grow exponentially.

In other words, your interest would be calculated not only on the initial principal but also the accumulated interest of prior periods adding up to big bucks. So if you begin investing as soon as possible for a college fund, time will be your friend. This is because you'll have more years for your money to compound and your contributions will be less as well.

How To Save For College

• Tuition and Expenses in Today's Dollars

  Average 2009 pricing for a public four-year state college education (not including room and board) will cost you about $8,500 per year for a total of $34,000 for a four year degree. You can at least double the cost for room and board if your child will be going away to college.

  However, you can save a significant amount of money by having your child attend a local community college for two years that provides for the transfer of credits into the four year university. You can google or contact your local colleges for cost information. If you go the community college route, the figure you put in this field will be lower.

• Years of College

  You can input two years for an associate’s degree; four years for a bachelors degree, and six to seven years for a masters.

• Years Until College and College Savings to Date

  Are pretty self-explanatory.

• Monthly Amount You Can Save

  Take a look at smart ways to save money to get an idea of how much you can realistically afford to allocate towards college.

• Estimated Rate of Return on Investments

  This figure will depend on your investment approach. You will earn a higher return investing in stock funds, however, as your child nears college, you're investment portfolio should be allocating more money towards more conservative investments (bonds, money markets). If you're not sure at this point, use a number between 7% and 9%.

• Estimated Inflation Rate

  The average inflation rate since 1914 has been 3.43% per year; with average college costs having increased by approximately 7% to 8% a year. Therefore, you could choose 5%.

• Your Federal and State Tax Rates

  You can leave this field blank if your investing through a tax advantaged 529 plan or a Coverdell ESA (please see below). However, if you're investing for college using a non-taxed advantaged vehicle such as a non-retirement mutual fund or bank savings account, you'll want to input your federal and state tax rates. You can find your tax rates by looking at your state and federal income tax returns you filed.

Next, click on the calculator's "get your results" link. The results will provide you with an estimate of how much your child's college education will cost annually and in total. It also provides you with guidelines on what adjustments you may need to make to attain your college saving goals.

College Money Management Investment Vehicles

If your child has 15 years before attending college, you will want to take advantage of stock funds which historically outperform bond and money market mutual funds. With 15 years remaining, we recommend allocating 85% towards stocks and 15% towards bonds.

We like index funds for our stock and bond mutual fund investments because index funds outperform about 75% of non-indexed mutual funds. Also, index funds have much lower fees and expenses (expense ratios) so you're earning a higher return.

As college draws closer, you'll want to allocate more college investment funds toward more conservative investments. We suggest you speak to at least three financial advisors to determine what is in your best interests.

College Money Management – The 529 Plan

With a prepaid tuition plan, you basically pay for future tuition at today's rates. With the college savings plan, you can invest in mutual funds or similar investment vehicles.

529 Primary Advantages

• Tax Free Earnings

  The money you earn in the 529 plan accumulates tax free.

• Gift Tax Write-Off

  Your investments in the 529 are considered gifts by the IRS.

• Higher Contribution Limits

  It varies from state to state, but you'll find generous contribution limits with no income restrictions.

Primary Disadvantages

• Investment Restrictions

  You can't invest into whatever you want. Your investment choices will be determined by the 529 plan.

• Can Only Use For Higher Education

  You can only use the 529 for your child's college education and not K-12 or pre-college private schooling.

• Expenses

  529 plans charge higher expenses than the Coverdell ESA (please see below) which will reduce your return on investment.

College Money Management – The Coverdell ESA

We invest in ESA's over 529's for several reasons. In fact, the only advantage we see that a 529 has over an ESA is the higher contribution limits which aren’t even an issue if you begin investing sooner rather than later.

Like the 529 plan, your account earnings on an ESA are not taxed; so your money grows tax free and the money you pull out of the ESA for education is also tax free.

Also, unlike the 529, with the ESA you can invest in whatever you want. You get to choose your investments.

We also like ESA's because they're less costly than 529's which charge fees and have higher expenses. With our ESA's, we invest in Vanguard index funds because we pay no fees and have extremely low expense ratios. This makes a big difference on the rate of return you'll receive on your college investment!!

ESA's will also allow you to use the money not only for college, but also for K-12 schooling, unlike the 529.

Another great feature, is anyone can contribute to the ESA, not just you. So, you can have friends or relatives contribute to the fund for birthdays, holidays etc.

You'll find that ESA's are also very flexible. You can transfer to another ESA or 529 plan and you can change the beneficiary on the ESA account.

Although ESA's have qualifying income limitations (modified adjusted gross income between $95,000 and $110,000 for single filers and between $190,000 and $220,000 for joint filers), don't worry; you can give the money to your children and let them open the Coverdell ESA themselves.

College Money Management Summary