Saving for College

How are you supposed to save such a huge sum in a down economy with increased costs of living and the need to save for retirement, too? Here, financial experts and college advisers offer eight tips to help you understand your options and meet the challenges of saving for college.

By Deirdre Wilson and Caroline Grannan

Saving for CollegeEconomic turmoil and a nasty recession have rocked this country for two years now. And thousands of people – many of them parents trying to save for their kids’ college education – have lost jobs and investment income because of it.

In spite of the losses, which are finally starting to taper off, financial experts continue to urge families to put money aside, continue to invest and plan for their kids’ college education as early as possible.

How early? Dropping funds into a dedicated savings account even before your baby is born isn’t too soon, the experts say.

During the 2008-’09 school year, the average yearly cost (tuition, room and board) was about $14,300 for a four-year in-state public school and about $34,000 for a private university, according to the College Board, an association serving colleges, universities, students and families. But these fees can top $50,000 per year at some private universities. Multiply that by four years, or more.

How are you supposed to save such a huge sum in a down economy with increased costs of living and the need to save for retirement, too? Here, financial experts and college advisers offer eight tips to help you understand your options and meet the challenges of saving for college.

1. Start saving as early as you can.

If you start saving early on – even with small but regular deposits – compounded interest could make up as much as 25 percent of your college fund when the time comes to use it.

“Create a financial plan,” advises tax attorney Shannon Nash, author of For the Love of Money: The 411 to Taking Control of Your Taxes and Building Your NetWorth (iUniverse Inc., 2005). Figure out how much you can put away each month for college savings, consult with a financial planner about savings plans, and re-evaluate your monthly expenses to figure out where you can turn “discretionary” spending into college savings.

2. Don’t take on “impossibly huge” savings goals.

Instead, plan on saving one-third of the college cost beforehand, advises Robert Franek, senior vice president/publisher at the Princeton Review, the well-known college advisory service.

Author Mark Kantrowitz, creator of the widely acclaimed website, interprets the one-third rule this way: “You should expect to save one-third of the anticipated college costs, pay one-third from current income and financial aid during the college years, and borrow one-third using a combination of parent and student loans.”

3. Seek financial aid, scholarships, grants or other assistance, but don’t overestimate what you’ll get.

The good news is that more than half of all students receive some kind of financial aid, according to the College Board. It’s a myth that only low-income families are eligible, adds Franek.

Families with a household income of $75,000 or more can still qualify for significant aid, particularly when an expensive school is involved, or two or more siblings are in college at the same time, according to Kiplinger’s Financing College guide.

Scholarships and grants are the ideal aid – free moneywith no repayment obligations. There are many scholarships available, awarded for everything from academic excellence and athletic prowess to financial need and civic service. There are scholarships for tall students, left-handed students and even those who attend their high school senior prom in an award-winning outfit made entirely of duct tape (visit, for more on these unusual scholarships).

Just don’t assume that your child will get enough scholarship money to significantly cover college expenses.Research and pursue scholarship options, but don’t assume that the aid will be easily available.

4. Check out “529” government college savings plans.

These popular plans (which invest your money in stocks, mutual funds and/or bonds) are tax-deferred accounts used exclusively for college savings. Any relative of a child can set one up.Some employers even offer tax-free withholding from salary for 529 plans. And you pay no taxes on 529 funds even when you withdraw them to start paying for a child’s college education.

The 529s are state-sponsored (meaning the state partners with an investment firm to give families investment options to help save for a college education).

The best thing about 529s is their flexibility, says Joe Ciccariello, vice president of college planning for Fidelity. If your child drops out of college or never starts, 529 money can still be used to pay for college for another family member. The taxes only kick in if you use the funds to pay for something other than a college education. Further, Fidelity offers different types of 529s, including a “Life Cycle” plan where investments are more aggressive when the child is younger and become more conservative as he or she nears college age.

Even families of teenagers who’ve delayed saving for college can benefit from 529 plans. “You can still take advantage of four years – potentially eight years of growth for your investment [if you invest in a 529 plan through the high school and college years],” says Ciccariello.

You and your financial adviser can regularly review the investments in your 529 plan. Still, if the losses that some people experienced during this economic downturn scare you – and you don’t want to risk losing any of the principal you’ve put in – Fidelity offers a money market account that provides interest on your savings. It just doesn’t yield the kind of returns that an investment plan can provide, especially when the current interest rate is as low as .01 percent.

Understandably, Fidelity believes a 529 plan is the best plan out there when it comes to saving for college.But there are other savings plans available. “You need to figure out which one makes sense to you,” Ciccariello says. In addition to a 529, for instance, you might also consider a regular savings account, although it would be fully taxable, or a “custodial” account that offers limited tax savings.

5. Keep college funds separate from other savings.

With a separate account dedicated to college, you’re less likely to go after that money for other needs.

What about tapping into other savings accounts for college expenses? Retirement savings are still viewed as sacrosanct, untouchable even for the life-changing objective of a child’s college education. As many financial advisers will tell you – there are loans for college; there aren’t loans for retirement.

Still, it’s possible to be exempted from penalties for early withdrawals from 401(k)s and Roth IRAs by getting a “hardship distribution” for education. And while it’s not recommended, college is one of only a few exceptions that might merit tapping into a retirement account, Nash says.

6. Make adding to the college fund as automatic as possible.

Have payroll deductions directly deposited into a separate college savings account. Even if you can only save a little bit each pay period, something is better than nothing. And once saving becomes a habit, it’s easier to increase the amount put aside as circumstances allow.

7. Don’t fall for the myth that saving for college will reduce your financial aid options.

The amount of savings you have wouldn’t impact eligibility for financial aid, experts say, until the point at which you are so wealthy that you shouldn’t be applying for aid anyway. “Saving for college early on is always, always better,” Franek reiterates.

8. Help your child make good choices throughout the school years.

A desirable college applicant is in a better position for many reasons, aid and scholarship money among them.

• Consider innovative learning experiences, such as language-immersion schools or language courses that kids can take as early as kindergarten. Fluency in a second language is impressive to college admission officers.

• Support children’s extracurricular activities. But don’t go overboard in activities. Colleges actually lean more toward kids who excel at a few things, particularly if they’re unique.

• Encourage a child to get involved in community service. College admissions offices look for this, yes. But more importantly, community service gives your child a sense of responsibility and what it means to contribute to the world around him.

Caroline Grannan is a freelance writer and mother of two. Deirdre Wilson is senior editor of the Boston Parents Paper.