Can I afford college for my kids?

It's a question many parents aren't prepared to answer. Hopefully, though, the answer is yes, but you'll have to do some planning. Unless you are wealthy beyond your means, you cannot expect to wait for years and then suddenly have the money to pay for college when your kids are ready. The right thing to do is to start as soon as possible, even if you can only start small.

How much is college going to cost in the future?

( Sources: FinAid, The College Board )

Looking back a bit, in the 2003, the average yearly cost of a typical four-year public college was $13,833 and the average yearly cost of a four-year private college...$29,541.  These figures include tuition and fees, but also account for room and board, transportation, books and other supplies,  as well as personal expenses.

Of course, these costs will continue to rise.  How much will they go up? Over the last few years, college costs have increased at an rate of about 6 percent each year, in a time period where colleges were trying to deal with their own growing budgets. Going forward, however, college costs are expected to rise even more...up to 7 or 8 percent per year.

So, how will I pay for all of this?

Don't fret too much...most parents do not put away all of the money needed for college costs.  They do, however, put aside enough money to make a big, upfront "dent" in the costs. Then, when their child is ready to attend school, they fill the gap in the following ways:

• Private loans like home equity loans
• Financial Aid Related Loans ( Like the PLUS loan )
• Using their own investments, not originally intended for college ( IRA's, annuities, 401k funds )
• Student loans, grants ( see our article on FAFSA grants and Loans )
• Scholarships, Work/Study Programs

How much money should I save?

You should put aside as much money as you can. The more you save now, the less you'll need to borrow later. Start with an estimate of that covers all four years. Then,  decide how much of the bill you can reasonably cover...all of it? half? etc.  Then, use a financial calculator to see how much you'll need to contribute each month, allowing the magic of compound interest to make it grow.

Of course, it all boils down to what you can afford. If, after doing the math, you are coming up short, think about the following ideas to free up money to invest:

• Cut back, and put the extra into the college fund ( less eating out, trading down your vehicle for a cheaper one )
• Take your next raise at work, and pretend you never got it...put all of it into your college savings
• Ask relatives to send savings bonds or money in lieu of bithday or christmas presents to your child
• Once your child is able to, have them take on a part time job and contribute to the fund themselves

Start as early as you can

The right time to start a college fund is when your child is very young. Of course, that's probably the hardest time to start as well...college seems far away, and younger parents may not have the financial means and discipline to get started.

But, the earlier you start, the more you can take advantage of compount interest.  As an example, putting away $150 a month, at a 5% return, will net almost $30,000 if you start when your child is 5 years old.  If you start just five years later, when your child is 10, it drops to around $15,000.  That's half as much money!

The important thing is to start early, even if you can only afford a modest investment.  If you can only afford to start with $50 a month, do it!  You can up the investment level later.