A Positive Pregnancy Test Means, “Start Saving for College!”

Begin saving and investing for college the minute your doctor confirms you are pregnant with your first child.

Although the advice may sound like a very unfunny joke, financial planners and college admissions directors agree that college preparation begins in the womb. If you have a child today and college costs continue increasing at their current rate, by the time your newborn starts her first year at Harvard, that first year will cost her more than $100,000. You cannot afford to wait, and you cannot afford to count on scholarships and financial aid. If you begin managing the cost of college today, you and your child will have enough to finance the full four years. Experts strongly recommend you set-aside 5% of each paycheck in a preferred college savings plan, and they suggest five proven investment products…

Coverdell Education Savings Account You may invest up to $2000 per year in a Coverdell Educational Savings Account (ESA), and the principal will grow tax-deferred at the prevailing interest rate until the money is disbursed. Contributions are not tax deductible, but the accounts do have tax advantages. If the money pays the beneficiary’s regular college expenses, neither the student nor the account holder pays any income tax on the distribution. Of course, some restrictions apply.

Conventional Savings Account When you reach the Coverdell limit, put 5% of each paycheck into a conventional savings account until you accumulate enough to move into certificates of deposit. Most banks set a $5000 minimum.

Certificates of Deposit Requiring you leave your investment untouched for six months at a time, Certificates of Deposit typically yield approximately twice the standard savings rate. While your CD grows, continue your practice of saving 5% of each paycheck in the regular savings account. When the two accounts total $10,000, take that lump sum and invest in an annuity. Then, continue the 5% savings plan until you save another $10,000 for investment in a mutual fund.

Fifteen-Year Indexed Annuity Technically an insurance product, an “indexed” annuity guarantees a minimum rate of return and then assures extra interest at a rate tied to growth in equities. The best indexed annuities are tied to the Standard and Poors 500, which has averaged approximately 8% annual growth over the last 100 years. When the annuity matures, it pays a monthly income which your student may use for his college living expenses.

Moderate-risk Mutual Fund Not as safe as the other four investment instruments, a mutual fund nevertheless promises greatest growth over the long haul. Work with a trustworthy financial adviser to determine which fund best will take you to your goals.

Which investment product is right for you? The answer is “all of the above,” because the five different investments work together. Each time you build to $5000 in the conventional savings account, you move the sum to a CD; and each time the CD grows to $10,000, you move it to the mutual fund. The annuity keeps growing on its own. Remember two fundamentals of skilled money management: (1) These are buy-and-hold products; just forget the money is there, and let the accounts keep growing. (2) Check with your tax adviser to determine which investments allow pre-tax payroll savings, so that you gain some tax advantages every year you invest.

Get ahead of the game.

You can begin college before you graduate from high school, saving money by reducing your time to completion of your degree. One option: Follow the traditional fast-track to college credit by taking honors and Advanced Placement courses; some first-year students begin college with enough credits to become instant sophomores. A second option: Many community colleges also allow college-bound 18-year-old high school seniors to take introductory courses on their campuses. In some forward-thinking high school districts, seniors may take their economics and government classes at community college, so that they simultaneously satisfy high school graduation and college general education requirements. In most high school and community college districts, everything is negotiable, so it cannot hurt to ask. While you explore your fast-track options, find out if your college-of-choice has a summer “readiness” or “transition” program for freshmen; the finest schools allow entering freshmen to live on campus and take basic English and math courses before they officially enroll.

In 2010, the average college graduate left the ivy-covered halls with a diploma and more than $100,000 in student loan obligations, and most alumni agreed the result was worth the financial burden. They confessed, however, they could have and should have saved for college instead of accepting the loans. When a family begins saving and investing early, the cost of college does not deter promising students from attending the schools of their choice.

Photo credit: Graduating Friends by blakeamick/flickr
Peter Savage is a career consultant and content contributor for Super Scholar, a site with incredibly thorough information, reviews, and even 2012 online college rankings.

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