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College Savings: What The New Report On Higher Education Costs Means For Saving Plans

While most people were safely home for the holidays, the Department of Education released a terrifying new report: The estimated cost of college education in America is $62.6 billion. That seems like a staggering number until it's compared to how much the federal government spends on making college education affordable. The total of the grants, tax benefits, work-study opportunities, and loan subsidies provided by the federal government is $69 billion. That's right; America spends more money making college affordable than college actually costs.

The news of this finding is making waves in Congress, where an already acrimonious budget fight has some lawmakers looking at that $69 billion as a safe place to make easy cuts. This could mean a serious threat to your plans to save for your own or your child's college education. Let's take a look at some of the most common concerns about college savings.

Q: That's a lot of money. Is a college education worth it?

A: That's a complicated question, and it really depends upon what college gets you. For people who are perusing professional degrees to become doctors, lawyers, engineers, architects, or researchers in the hard sciences, a 4-year degree is definitely worth the investment. These careers are relatively recession-proof and have very high earnings potential. For people who are interested in technical degrees, some colleges are worthwhile, too. Getting a 2-year degree in medical technology, vehicle maintenance, or any other practical trade is relatively low cost and provides an excellent possibility of work after graduation. For these people, college is likely to pay off.

The traditional 4-year life-search, though, may not be worthwhile if it ends with a degree in business, English, philosophy, or communication. Fewer jobs are requiring these credentials, and the ballooning costs will put people who earn such degrees in dire financial straits if they can't land a job immediately after graduation. Earning a degree like this may be better done slowly while working and building a resume that gains practical job experience for the student.

Q: How much should I save for college?

A: The short answer is that you can never save too much. College education is expensive and is continually getting more expensive. If you were planning on using federally subsidized loans, scholarships, or work-study programs, know that these programs are always on the chopping block, even more so after the recent Department of Education report.

The cost of just one year at a public university rises by about 6% annually, so by the year 2030 it will cost your child $44,000 a year to attend school. Multiply that by 4 years, and you can safely assume that tuition will run in the neighborhood of $176,000. Add in room and board, books, and transportation, and $200,000 is a realistic expectation.

Many credit unions work with state universities to make "pre-payment" possible. This is like lay-a-way for college tuition. You lock in a price now and make monthly payments into an account, frequently with tax benefits. Then, you or your child has a tuition-paid 4-year college career lined up when ready. If you or they decide not to attend, these programs usually offer partnerships with other institutions or withdrawal options.

Q: What's going to happen to federal financial aid programs?

A: For a variety of reasons, many of the ways people traditionally paid for college are likely to disappear over the next several years. The rise of for-profit colleges and predatory enrollment practices has made the traditionally safe stance of being pro-education something of a liability in this political climate. Add to that the expanding costs of a college degree, rising unemployment rates, and a 10% default rate for student loans, and all of the federal programs that fund post-secondary education are likely to find their funding in jeopardy.

Private scholarships may dwindle in both size and availability as well. These programs are usually paid out of large, privately held trusts or other managed funds. As traditional long-term investment options, like bonds and mutual funds, experience greater uncertainty, the guaranteed payouts of private scholarships are likely to decrease, too.

Private financing will still likely be available. While many colleges offer their own loan programs or partner with lending institutions, you may be able to secure better rates from your credit union. They know you and your financial situation, so they may be able to offer you significantly lower interest rates on your student loans.

Q: What can I do to secure a brighter educational future for me and my children?

A: Even if you or your child don't end up going to college, putting money away into a tax-deferred savings program can still be a wise idea. A 529 savings plan, available from your credit union, is a tax-deferred college savings plan. You invest up to $300,000 (or have automatic deductions from your pay check). You pay no income tax on the interest, and if it's used for school, you never do. If you or your child receives significant scholarship money, you can withdraw the excess funding, frequently with no penalty. If you or your child decides not to go to college, you only pay a 10% penalty on the earnings, and must pay taxes on the interest that has accrued in the account as well.

That $200,000 you had budgeted for college would put a young entrepreneur in a better position with start-up funding, enable you or your child to buy a house, or allow the benefactor of the fund to start saving or investing for retirement. Saving now for college can pay great dividends, even if you never set foot in one.

Representatives from your credit union can walk you through the steps of setting up a 529 savings plan. It's a fairly straightforward process that involves little risk and can offer significant tax benefits over a savings account or a privately managed investment fund. Get started saving today!

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