Why you should save for college

WASHINGTON -- Every parent knows that college costs are painfully high, and yet so many people fail to save anything, even an amount that will get their child through one semester of school. Instead, they wait until their child is ready to go to college, panic and then turn to loans.

Many people can't handle the truth about the cost of an education. They don't put money away when their kids are small, and they take on more debt than they can handle: key ingredients in the recipe for financial disaster.

If you're a parent, you should be familiar with recent data on education spending that may inspire you to save more and to be smarter about taking out college loans.

The College Board, which tracks education costs, reported last week that tuition and fees at public four-year institutions rose 6.6 percent for the current academic year from a year ago. At private four-year schools, the increase was 6.3 percent.

Those increases far outstripped inflation, as measured by the government's consumer price index, which rose 2.8 percent over the past 12 months as of September.

"Here we go again," said a frustrated James A. Boyle, president of College Parents of America in a statement about the College Board's latest figures. "Price increases at both public and private colleges and universities again outpace inflation by a significant margin while students and their families again wait for the answer to a simple question -- why?"

At public four-year institutions, in-state tuition and fees now average $6,185. When you add in the price of room and board, the total annual cost for in-state students is $13,589.

At private four-year institutions, tuition and fees average $23,712. With room and board, total charges for the 2007-08 school year come to $32,307.

As those costs keep rising, so does a family's reliance on debt to finance a college education. But because federal loans often don't come close to covering tuition, fees, room and board, families are turning to private student loans.

In fact, the College Board found that a declining portion of education loans come from the federally subsidized Stafford program. Private loans now make up 24 percent of total education loans in 2006-07, up from 6 percent a decade ago. Most nonfederal loans come from banks and other private lenders.

Subsidized Stafford Loans, on which the federal government pays the interest while students are in school, declined from 54 percent of total education loans in 1996-97 to 32 percent in 2006-07, according to the College Board.

"For too long, parents have grimaced and borne the high price of college because they presumed that a higher education is key to their child's success in today's economy," Boyle said. "Surely, the day will come -- soon -- when parents say enough is enough."

Well, that day won't be today.

And making matters worse is that people don't seem to be saving what they should. A survey of 447 parents with varied incomes found that 54 percent have saved less than $5,000 for their child's higher education. Twenty-seven percent of respondents hadn't saved a penny.

The survey, conducted by the College Savings Foundation, a Washington nonprofit whose members include firms that offer 529 college savings plans, showed that 44 percent of those polled said they anticipate taking five to 10 years to pay off education debt. Thirty-eight percent expect to take at least 10 years to pay off average private college tuition funded through loans.

"These findings highlight a looming crisis for American parents and their children," said Chuck Toth, secretary for the College Savings Foundation. "It's dangerous for parents to begin seeing the financing of their children's college tuition as a second mortgage. As we have recently seen in the mortgage market, reliance on long-term debt can be expensive and precarious."

So now that you are likely depressed by this pricing and debt data, what are you going to do if you've got a child who you want to go to college?

What you shouldn't do is panic. As the College Board points out, average tuition and fee figures do not describe the circumstances of most college students. Forty-three percent of public four-year college students are enrolled in institutions with published tuition and fees between $3,000 and $6,000.

Most importantly, don't whine about the cost -- do something proactive, like invest perhaps in a 529 college savings plan. In a 529 plan, your contributions grow tax-deferred and when the funds are used for qualified higher education expenses, the money is not subject to federal income tax.

"Investing early and often can enable parents and their children to leapfrog a lifetime of debt," Toth said.

This is why it's important to keep reporting on the cost of college. Because maybe, just maybe, people will start saving something -- anything -- to help pay for their child's college education.

© 2007, The Washington Post Co.