Yesterday, we had a discussion with Gary Hoover , Ph.D., Professor of Economics/Assistant Dean of Faculty and Graduate Student Development for Culverhouse College of Commerce at the University of Alabama. Today, we’re continuing our look into the booming costs of a college education and we’ve asked Warren Smith, Associate Professor of Economics at Palm Beach State College in South Florida, to join us to help provide a few more insights for us on smart tips to save and prepare for both kids and parents.
|Q: How early should I realistically start a college fund, and what are some early strategies with which parents can take advantage?|
|Hoover: The college fund is just another form of savings . In that regard, it’s never too early to start saving. If children are not in the plans for the future or if they are, as much disposable income as can reasonably be put away should. Once it is a certainty that children are coming or the funds will be used for college, the funds can be transferred to other types of accounts. The strategy is to make sure that the funds are accessible. Some accounts offer higher yields but stiff penalties for early withdrawals. Be willing to sacrifice a bit on returns to ensure access.|
|Smith: Ideally, parents should begin saving and investing for their child’s education as soon as possible. If a couple plans to have a family, they can start before the children arrive. They can set up a payroll deductible account earmarked for this specific purpose. If they plan to send their children to a public university, they can enroll in their state’s 529 plan.|
|Q: What are some of the biggest mistakes parents can make in regards to saving for college?|
|Hoover: The biggest mistake is to not think about savings. Whether the funds are for savings, or retirement, or just for a vacation, the key is to start early. Give the “magic of compounding interest ” a chance to work. By that I simply mean that savings should start early so that your principle has time to accumulate as much interest as possible. The mistake is to not think about these types of things until the funds are needed. It’s much easier to allocate funds that are already in savings to different needs than it is to find them and use them after the fact.|
|Smith: Remember, if you start early you have at least 18 to 20 years to save. Because of this longer horizon you can invest a little more aggressively in stocks and bonds . I recommend that parents discuss this with their personal banker or financial advisor.|
|Q: What are the best financial lessons I can teach my kids when prepping for college?|
|Hoover: The lessons learned early last a life-time. The main lesson in preparing children for college is that it’s not free. Even if they aren’t paying for it, someone is. Children will be exposed to budgets and increasing credit opportunities. It’s important to instill in children that costs will be incurred and that isn’t necessarily a bad thing. However, someone must pay those costs and sometimes the benefits are just too low and not worth it. In my years of teaching one of the most common things I hear students say is that college is free because parents are paying. Clearly, they have not been taught that costs are costs and are real even if paid by others.|
|Smith: Students must be aware that someone, or they, are paying for this education. It is not free! If they are cognitive of the cost and the difficulty of raising this money for college, I believe they will not treat education as a joke. This is why if they pay some portion of the costs they can see the significance of it.|
Part two will be published tomorrow morning.