The Best Investment to Start Saving for Your Child's College Tuition

One of the biggest issues for new, or relatively new, parents is how to pay for their child's future education. It is no secret that the cost of a collegiate education is skyrocketing. The average cost of tuition for four years at a public state university has risen to around fifty thousand dollars. For private schools, this number can exceed two hundred thousand dollars. With a rising percentage of students taking five or more years to graduate instead of the traditional four, this number can be increased by twenty percent or more. And these are 2011 prices - just imagine what they will be in 2029, when today's new children will be at college age! Parents have to prepare as if these costs will continue to rise.

Not long ago, saving for a child's education was a luxury more than a necessity. Students could always take out loans and pay for their own education, then pay it out over a few years after they get a job. In today's world, this leads to students being saddled with a ton of debt coming out into an uncertain job market. This is not an ideal scenario that any parent would want for their child. The ability to pay for an education straight up is more important now than ever before. As loan debts and interest rates on that debt rise over time, this becomes even more important.

So, how should parents save for this huge cost going forward? I am not about to make specific investment advice, especially in this economy. Rather, the best solution is to put a certain amount of money away from each pay check and invest it into safer investments for that have lower returns, but much less risky. This way the number not only will grow with monthly allotments, but the money will also compound on a regular basis growing on itself.

Not to venture into a finance lesson, but this is best displayed through a hypothetical scenario. We will start with the month of a child's birth. Let us assume a take home salary of $3000 per month. Let's put 5% of this ($150) into the college on a monthly basis. For the purposes of this study, we will ignore the possibility of any future raises or escalators. Obviously those would significantly help the contribution. We can put this money into a safe steady growth fund - for the purposes of this hypothetical, we will say 3% annually. This amounts to 0.25% per month.

I will not bore you with the financial equations, but after 1 year, this account will have grown to $1824 on a principal of $1800 monthly installments. Within 2 years, this account will have grown to $3705 (on a principal of $3600). Within 5 years, the investor will have almost $9700 on a principal of $9000. After 18 years have passed, this account will have accumulated almost $43000. Now, that is a pretty nice nest egg to apportion to your child's education. Obviously, if you contribute more or net a higher rate of return - this number will be significantly higher.

Be an Informed Consumer - Understand Those Student Loan Terms Before You Sign

The smart thing to do before you actually accept a student loan would be to read the fine print - the student loan terms and conditions. You do have a choice to shop somewhere else if the terms of your loan seem unfair.

The thing is, people spend the best years of their life paying off their student loans. These aren't years that you want to waste on an unfair contract. The more careful you are signing the contract, the better it'll be over the long term.

Let's take a quick look at some of the student loan terms that you're likely to come across on any kind of student loan, and see how you should assess them. This isn't really a very complete list though. It just touches on the most important points. Before you actually sign a contract, you should probably talk to your school's financial aid administrator to really understand your contract.

Let's start with the interest rate - something that most people agree is the most important part of your loan. This is the percentage of your actual loan amount that you will pay them every month for the privilege of using their money. Now the rate may either be a fixed percentage or it may be a variable sum - where they reserve the right to change the interest rate from time to time. And they may charge interest on the main loan alone or the loan plus other fees added.

Should you be alarmed if it's a variable term interest rate? Federal Stafford loans usually use variable rates. But just because it's variable, doesn't mean they can put in any number. They usually specify how high it can go. When the interest rate kicks in, some loans will charge you interest only once you graduate. Others will charge you interest from day one. Make sure you understand all the student loan terms to do with this.

Every loan on earth comes attached with a few charges and fees. And student loans are no different. You'll find that the point at which you actually receive your loan, they charge you something called origination fees. Sometimes they charge you this when you actually begin to repay the loan. And there will be penalties for when you miss a payment come the day that you begin repaying your loan.

You need to take a look at your student loan terms to find out if they take these fees out of the loan that they're giving you and only give you the remainder. Other lenders will just add the amount of the fees to the loan. And you have to pay interest on that too. That isn't a very pleasant prospect, needless it is to say.

And finally, take a close look at how long the loan is for. The longer they give you to repay your loan, the longer you'll be making those monthly payments. And it actually adds up to more money.

How to Use Cosigners With Student Loans

When a student is preparing to go to college, one of the biggest questions often becomes, with what money. Some parents scrimp and save for years for their children's college fund; others address more immediate concerns as their children grow up and fall short when the time comes. Some students may have some of the money to pay for college, while other have little to nothing. The most popular ways to cover the costs are through scholarships and grants, because the money does not have to be repaid. When this is not an option or it is not enough, a student loan may be an alternative. Sometimes the student can accept the responsibility of borrowing and paying back a college loan; sometimes, however, they can't. Either way, the student's parents, grandparents or legal guardian may consider cosigning on the loan.

Terms
When someone cosigns with someone else, they agree to take responsibility for the loan if the primary borrower fails to make payments on time and in full. Depending on the financial stability of the potential cosigner and the trustworthiness of the student, there may or may not be anyone willing to cosign the loan. In some cases, the person does not have stellar credit and does not want to put it at further risk. In other cases, they may not have the financial abilities to agree to another payment should it be necessary. When they do agree to cosign, the complexion of the loan changes; sometimes dramatically.

Approval
When a student has an established adult cosign on the private loan, it often improves the chances of the application being approved. With two individuals instead of one to look to for payments, the applicant is a better risk for the lender.

Interest
Some lenders will lower the interest rate for parent-student loans. This not only encourages the parent to cosign, it places a lower risk on the account. Lowering the interest rate further improves the chances of prompt repayment.

Release
In some cases, the student is able to get a cosigner on the account. If circumstances change and the borrower feels that they can handle the principal and interest monthly payments, it is possible to apply for a release for the cosigner. For example, the borrower may be required to make 24 consecutive payments on time and in full before the cosigning responsibilities are lifted.

Regardless of the final outcome, having someone cosign a loan sometimes makes the difference between someone going to college and staying home or working at a lower paying job.