Here is another post from our recent hire Zach Scott. Enjoy.
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Ah, babies! So adorable, so sweet, so…everywhere. At least that’s the case in my neighborhood and age bracket. A lot of close friends have added to their families recently, and my wife and I have been making house calls to visit the new additions and their proud parents. Even if I’m not calling on a friend’s baby, I am most likely dodging double-strollers while walking outside. I am at an age where it is hard to avoid seeing babies and talking about babies - but I really can’t complain. It’s been a delight to see the joy being a parent can bring.
But babies, as cute as they are at a young age, grow up, and
if you’re like a lot of my friends you are probably thinking about next steps
in terms of saving for your little one’s education. Higher education in the US
has hit choppy waters over the last 10-15 years, since I graduated from college,
with some students amassing loans of upwards to $250,000 for degrees at
institutions with lackluster credentials and few to any job prospects. But what
does college really cost? While some people will become paralyzed by fear and
cry out to the heavens, “Two hundred and
fifty thousand dollars!?” it is important to keep in mind that a 4-year
education currently only costs that much at the most expensive universities in
the country. And that cost assumes your child won’t work while in college,
receive financial aid, or get a scholarship.
To get a better idea of what of what the cost of college currently
looks like, I pulled the rates for my alma mater, Indiana
University, a pretty good institution:
University
of Indiana at Bloomington – ANNUAL COSTS 2014-2015 Academic Year
|
|
In-State Tuition & Fees
|
$10,388
|
Out-of-State Tuition & Fees
|
$33,240
|
On Campus Room & Board
|
$9,494
|
Books & Supplies
|
$1,500
|
Transportation
|
$930
|
Personal Expenses
|
$2,106
|
That comes to a total annual cost of $24,418 for in-state and $47,270
for out-of-state students. If your child is one year old right now (and
assuming our higher education system doesn’t undergo fundamental changes in the
near future), this means that the cost of a 4-year college education, using a
5% inflation rate, will be $241,223
by graduation. For an out-of-state education using the same assumptions, the
cost rises to $466,975.
If you are appalled by those figures, you’re not alone. And
while it is debatable whether or not the cost of college will continue its
meteoric rise, those figures are plausible given the trends of the last 30
years. But, remember, those figures don’t take into consideration money you can
begin to sock away and invest right now for your child’s education. For
example, if you start putting away $400 a month toward your child’s education
today, in 20 years, using an annual rate of return of 6% before tax, you will
have saved $145,071, enough to cover 60% of your child’s in-state education.
For out-of-state tuition, you will have saved enough to pay for 31% of the
total cost of college.
Even though the funding gap that remains for both in-state
and out-of-state tuition is still wide - and $400 a month might be more than
you can afford at the moment - don’t forget that the money you make right now is
not what you will be earning in 10 years’ time. For most people, peak earning
years are between the ages of 40-55. Most likely if you are just starting a
family you haven’t even hit that age bracket yet. As your income rises, you’ll
likely be able to save the $400 a month much more easily or, perhaps, even
quite a bit more.
The point is that affording your child’s education is much
like saving for retirement. Start as early as you can, contribute regularly,
and have a plan to reach your goals. If you are unsure of the savings vehicle
you should use or how your money should be invested for your child’s educational
needs, consult a professional. Then you
can sit back and enjoy all that cuteness, without worrying about what the
future holds.
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