BOSTON ( MainStreet) -- A new school year is in full swing and, as anyone with a student off to college for the first time can attest, the expenses will be substantial and ever-increasing.
Hearing the war stories of their neighbors can trigger some understandable panic on the part of parents with young children. Saving for college is neither as simple, nor as effective, as it used to be. Unique strategies may be the only way to afford higher education.
|As the cost of a college education keeps rising, simple savings accounts just don't cut it for tuition, room and board.
"It is the biggest expense our clients will incur, second to the purchase of their home," says Denis Horrigan, CFP, a partner at
Connecticut Wealth Management
, a firm offering financial planning and asset management through LPL Financial that actively manages more than $200 million in client assets.
Horrigan estimates that a family with three children may expect to find the cost of a private institution will cost upward of $800,000 before scholarships, grants or aid kick in.
Several challenges confront families, even if they start planning while their kids are young. A short time horizon escalates the pace of saving and makes down market cycles potentially devastating. The rising cost of secondary education also makes the savings goal a moving target.
Horrigan draws a comparison between saving for college and planning for retirement.
"When you are saving for retirement, what you are trying to do is grow your assets at a rate that's greater than the general inflation rate," he says. "Well, when the general inflation rate is 3% that's attainable. With the inflation rate of college education at about 6% a year, that becomes your hurdle. If you are putting money in a savings account earning 1%, you are going backwards. Your best option is to utilize some sort of investment vehicle."
Increasingly, new solutions are being offered to help families save for college.
Since the 1990s, states have offered 529 Plans, tax advantaged investments (the earnings grow tax deferred) that operate similar to how a 401(k) or IRA does. Each state has retained firms that manage an investable slate of funds. Investors are not limited by geography when choosing to establish a plan.