Daily Aid 117: How to save money for college safely

27 April 2009 2 views No Comment

Daily Aid 117: How to save money for college safely

Student Financial Aid News

With Congress poised to give the White House a smoother path to push its plan to end the lender-based student loan program, President Obama warned Friday that he was girding up for a fight with banks and their “army of lobbyists.” Obama’s 2010 budget proposal in February included an aggressive plan to make all new federal student loans out of Federal Direct Student Loan Program, using tens of billions of dollars in savings from eliminating the competing Family Federal Education Loan Program to ensure a stable and steadily growing stream of funding for the Pell Grant Program, the chief source of federal need-based financial aid. The administration was banking on the fact that while many colleges use and support the lender-based guaranteed student loan program, the prospect of a Pell entitlement, which they have long coveted, would outweigh their reservations.

Commentary

Not much news here except that the use of reconciliation in the budget process will likely accelerate the timetable for changes. What impact will this have? For the immediate future, none – any changes to student lending will not become active until at least July 1, 2010. Stay tuned, of course.

From NASFAA:

“For the first time since 2006, Tufts University this year looked at how much aid it could afford to give students when considering about 5 percent of its applicant pool,” Bloomberg reports. “After reviewing 15,039 applications, Tufts accepted about 3,800 students without regard to their ability to pay, said Lee A. Coffin, dean of undergraduate admissions. The school, in Medford, Massachusetts, then reconsidered 750 applicants and offered admission to another 150, including about 100 whose ability to pay full tuition was deemed a plus, he said. For Tufts to take any student’s finances into account is another indication of how colleges throughout the U.S. are responding as endowment values plunge and operating budgets come under pressure, said Jonathan Reider, director of college counseling at San Francisco University High School.”

Commentary

Expect this rather obvious trend to continue. At the end of the day, a college is a business and needs to remain cash positive. If that means more students who can pay “sticker price”, then that’s what we’ll see in college admissions.

What you see in college tuition is consumerism writ large – students want first class facilities and amenities with their education, colleges want to compete for the best students, have to pay top dollar to provide the amenities, staff, and faculty, and tuition goes up. That’s been the mantra for decades in higher education. As the economy contracts severely, colleges are still paying top dollar but things like financial aid, alumni donations, and government grants are receding. Colleges can either rein in their costs or change the composition of their student bodies to increase the number of people who can and will pay full price. I would expect this trend to continue.

Scholarship Update

Ruth Ashton Taylor Academic Scholarship: The Good News Foundation is awarding a $5,000 academic scholarship—as well as a mentor—to an exceptional students who demonstrates she not only has the desire to become a television journalist, but the determination to uphold the standards set forth by the profession.

Details at our free college scholarship search site.

News You Can Use

How do you pick, as a parent or student, an investment that will do well for saving for college in the long term?

Disclaimer: I am not a financial analyst, stock broker, or certified financial planner. Take any and all advice with a grain of salt and consult a qualified financial professional before making any significant changes to your finances.

GIven how tumultuous the economy has been over the past couple of years, a lot of the advice that was dispensed during the boom for saving for college just flat out doesn’t apply during the bust. So what does work? What should you be looking for? Here’s some starter tips.

1. Determine your appetite for risk. Is your goal to have every dollar you invest be there on high school graduation day? If so, you’ll want to avoid anything not FDIC insured (or NCUA insured). Capital preservation – meaning you never lose any money you save – comes at the expense of little or no growth. If you’re lucky, you’ll earn pennies on the dollar saved – but you will never lose what you put away. Look at certificates of deposit (CDs), FDIC savings accounts, and federal government bonds like FDIC bonds and Treasury savings bonds.

2. Want to go gambling? Learn to use tools like Google Finance to see how various types of investments perform over time – and look at longer time periods like 5 and 10 year terms to see how things look overall. Research before you buy!

3. Determine your timeline. The closer you get to needing the money, the more conservative you should be if you’re investing with risk. Stocks and equities may be a good idea when a child is 2 years old, but when they’re 17 years old, you want to aim for minimal risk. As time goes by, shift more and more money into lower risk places.

4. There is no free lunch. Above all else, there is no shortage of scammers and snake oil salesmen promising every kind of benefit under the sun for you if you buy their products, from books to seminars to recommended investments. Absolutely be looking around to learn more about saving and investing, but be aware that qualifications for writing a book these days are virtually non-existent, and qualifications for holding your own investment seminars and other commercial ventures are even lower.

If it sounds too good to be true, it is.

What would be the strategy I would recommend to my friends and family? A three part strategy:

1. Set up conservative savings vehicles like CDs, bonds, etc. to minimize risk and maximize preservation of capital. There’s very little reason to go speculating in the market when you can get income via other means. Those limited investments I would make – gambles – in the stock market would go towards mutual funds with very low fees and dividend payouts.

2. Look at some basic online affiliate marketing you can do through sites like Commission Junction and Shareasale (disclosure: paid link). Take any money you earn through these relatively passive means – and we’re talking monthly checks of $50-$200, not quit your day job money – and divert them all to your savings vehicle from step 1. Never let any money earned through this secondary job be spendable.

3. Hunt for scholarships like crazy from the moment that you’re eligible to do so. For some students, this is as early as third or fourth grade. Enter competitions, contests like ScholarshipPoints.com, and apply for every scholarship you’re eligible for as often as you can. Any scholarship money you get should be plowed into the conservative savings vehicle in step 1.

Does this perform better than stock market investments? Do the math. If you invest $1,000 at 6% for 10 years (with no additional deposits), you’ll have $1,819.40 assuming your investments maintain that 6% return. If you choose to save at 2% but win a $500 scholarship every year, at the end of the same 10 years you’ll have $6,760.40 and no risk to your college money. When it comes to saving for college, finding scholarships and saving them in a conservative, no-risk savings vehicle is the way to go, and the advice I’d give to anyone whose future I cared about. It’s very hard work, unquestionably, but the rewards are worth it, especially compared to gambling in the stock market.

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