Costs, Financial Aid, and Saving

There are three elementary but vital questions you must ask yourself if you have children who someday will be going to college:

1. How much is school going to cost?
2. How much financial aid can we expect?
3. How much should we save?

And the answers are:

1. A lot.
2. Not as much as you would like.
3. A lot.

All too true, unfortunately! And worse, costs will only be going in one direction – up, up, up – in the years to come. I can’t emphasize too strongly how important it is to start planning and saving right now – even if your kids are still babies.

It’s possible to get a fairly decent understanding of how much the tab for college will be. Any number of books, calculators and worksheets are available to help with that (including a free worksheet at CollegeCostsHowMuch.com). Understanding the numbers will give you a sense of how big a challenge your family will be facing.

I’ll admit – the numbers can be paralyzing. So let’s dip into the basics about where they come from and how best to plan.

1. How much is school going to cost?

Much of the cost depends on what kind of school you select. State-run colleges are less expensive than private colleges – if your child qualifies for in-state residential status. Two-year community colleges are cheaper than four-year universities. Tuition is the heaviest component of the college tab, but don’t forget about room (where your child lives at college), board (the food he consumes while there), books, travel expenses (to and from school) and various school fees – not to mention a little extra for the occasional night out to blow off steam after finals. It all quickly adds up.

In 2006-2007 the average total cost per year to attend a four-year public university was $12,796 for an in-state student. It was $30.367 for a four-year private university. At the most expensive private institutions, the price tag has already reached $50,000 a year. According to the College Board, if college costs grow at only 5 percent annually, by the year 2024 the total cost of a four-year college education could average about $125,000 at public universities and $300,000 at private schools.

• Estimate what college will cost when it is time for you or your child to enroll using our Cost of College Calculator.

While these numbers can be extremely daunting, it’s important to keep in mind that financial aid is available for eligible students and it can go a long way toward easing your burden.

2. How much financial aid can we expect?

The classic answer most financial aid professionals give to that question is: "More than you thought, but not as much as you'd like." If you plan wisely, this answer may be accurate for your family. However, if you've been lax in planning, it's likely you will be greatly disappointed by the financial aid process.

Of all the topics involved in saving for education, financial aid is likely to be the most complex, so we'll devote the entire next article to explaining how it works and what options you might have. In the meantime, it is worthwhile to understand the basics.

A good rule of thumb for computing financial aid is to take 20 percent of your top-line income (before any deductions) and add 5 percent of your assets (not including your residence). This amount is a very rough approximation of how much you will be expected to spend per year for your student's education.

Here's an example. If you make $100,000 per year and your assets are worth $200,000, universities would expect you to cough up $30,000 (20 percent of $100,000, plus 5 percent of $200,000).

In this example, if your child goes to one of the more expensive schools with a price tag of $40,000 per year, the school would provide $10,000 in aid while expecting you to spend $30,000. On the flipside, if your child goes to a state school that costs $20,000 per year, there would be no financial aid. The reason: According to colleges and universities, you have the capability to contribute up to $30,000 per year for tuition, which completely covers the expense.

3. So ... how much should we save?

Simply put, you should save an amount equal to the total out-of-pocket expenses for four years of college per child. If you're unlikely to qualify for financial aid, this will be the whole shebang—tuition plus extras. If you're likely to qualify for assistance, savings should equal your Expected Family Contribution, a term that refers to the amount left for you to pay after you receive financial aid.

To determine the exact amounts, consult the books, worksheets and calculators I mentioned earlier. Most people will be looking at a savings goal of at least $500 to $1,000 a month. Ouch, right? But keep in mind that you're starting to save for one of the most important investments you will ever make. Just be forewarned – it is going to take a lot of money.

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