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      Saving for a College Fund

      Without retroactive action by congress, student loan rates will double this fall from 3.4% to 6.8%. Considering how expensive a college education has become, how should families prepare for the future expense of a college education? We invited David Bethel to break it down for us.

      Question: As college costs have escalated in the past several years, is it still important to get a college degree?

      Answer: Yes, the average annual income of a college graduate is about $20,000 a year higher than the average annual income of a high school graduate. But that statistic is only the starting point. College graduates spend less time unemployed, they like their work better, they are healthier, and they live longer. And, their children are more likely to graduate from college so the benefits are multi-generational.

      Question: We have talked about the fact that college costs have been going up. How much does it cost to attend college today?

      Answer: It greatly depends of the school you select. A Missouri public 4 year college will have an annual tuition of $7-9,000. That is about three times as much as a public 2 year community college. On the other hand it is about one-third of the cost of a Missouri private 4 year college with tuitions in the $19-23,000 range and up.

      In addition to tuition is the cost of room and board. Of course, you can always choose to live at home and commute, but that is not without expense. Room and board will add another $6-8,000 a year to the total. So, the least expensive route is 2 years of community college and 2 years of state college. The total tuition and room and board will be about $50,000. If you opt for a private college experience, the total will easily exceed $100,000.

      Those figures do not include any grants or non-loan scholarships that are available. Collectively colleges offer many millions of dollars of non-loan financial aid. In Missouri the A+ program covers most of the costs of attending a community college other than room and board.

      Question: How much of the cost of a college education can a student borrow?

      Answer: There are many opportunities to borrow money for college. However, only a federal direct loan is available without a parental co-sign. That means that a student is only borrowing money when it is a federal direct loan. The parents are borrowing the money if they co-sign for any other loan. A student can borrow up to $5,500 as a freshman, $6,500 as a sophomore and $7,500 as a junior or senior. If they need more time, they can borrow up to $31,000 total. As you can see when the costs will typically range from $50,000 to $100,000 a student cannot borrow all of the costs of college.

      The loans often accumulate interest while the student is attending college, but the loan repayment does not start until college ends.

      Students are often shocked at how much the loan repayment is on these loans and how much of their earnings it takes to settle this debt.

      Question: If the parents must come up with the rest of the cost and they have not saved enough, can they borrow money for college expenses?

      Answer: Yes, parents can borrow all of the rest of money if necessary. Other than private loans, the best option is typically a PLUS loan. PLUS stands for Parent Loans for Undergraduate Students.The interest rate is now at 7.9% for PLUS loans. These must be paid back over 10 years.

      Paying the minimum on these loans means the parents will pay almost half as much in interest as they borrow. A parent borrowing $50,000 will pay back almost $75,000.

      Question: What are the best strategies for parents to save for college expenses?

      Answer: The first, best strategy is to start early. Having a child reach college age should not be a startling event. You should have noticed they were around the house during the 18 years before they start college. Saving $200 a month for 18 years (earning 5%) will result in a savings of $67,500. However, if you wait and only save for the last 8 years you will have less than $23,000 or only about 1/3 of the amount if you start at birth.

      Today there are 529 plans that can be usefull savings tools because of the tax benefits. The Missouri MOST is a 529 plan. And there are education credits and deductions while your child is attending college that really help. But this is a pay-me-now or pay-me-later issue. It is much easier to put a little away every month before college than to pay a large amount every month after college starts.

      Finally, it is important that you not save the money exclusively in your childâ??s name. Those accounts can work against you as the FAFSA (Free Application for Federal Student Aid) formula used to assess eligibility for grants uses a much large percentage of money in the studentâ??s name than in the parentâ??s name.

      Financial Planners of Missouri

      110 S. Franklin St.

      Kirksville, MO. 63501