Some parents start saving for college before their child is born. But let's face it — that's not most of us. Even if you have a high schooler and haven't planned ahead, there are ways to survive sticker shock and pay Junior's college bill.
For the 2010-2011 academic year, the average cost of tuition plus fees, room, and board was $28,130 for a public school and $36,993 for a private one. Ouch. The good news? Few have to pay the full bill. Scholarships and grants — otherwise known as "free money" — come from many sources. And, while you might save at state or community colleges, you can find deals at top private schools.
"Sometimes the schools that are the most expensive are also the most generous," says Rob Franek of "The Princeton Review," which publishes America's Best Value Colleges. However, despite the relief free money and last-minute loans provide, you still need to save as your children grow. Which strategies suit you best depends on how old your kids are.
Infant/Preschool: Long-term compounding of investments is generally your best strategy. Put money aside monthly through automatic payroll deductions. It's too easy to spend savings when your child's freshman year seems far off. And think about early contributions to the popular college savings plans described below. Any baby gifts of cash you receive could go right into these accounts.
Kindergarten/Elementary: Consider a Coverdell educational savings account — formerly known as an Education IRA — is a good long-term choice since contributions and earnings in the account need years to accrue.The annual maximum contribution is $2,000 per beneficiary, and earnings and withdrawals are tax free for qualified educational expenses. In addition to paying for college, funds can also go toward elementary, secondary, and post-secondary school costs — a plus for parents of younger kids.
The IRS imposes household income limitations of $190,000 - $220,000 for couples filing joint tax returns. With children this age, you may have heard about Prepaid Tuition Plans. They allow you to buy future in-state public tuition credits at today's rates.
But buyer beware: Some financial planners view these as risky. Why? They may cause you and your kids to feel locked in to attending certain schools as some plans carry substantial penalties when used toward private or out-of-state institutions.
5th Grade through Middle School: At this age, kids can contribute part of their baby-sitting or newspaper route money to a tuition savings account. College still feels far off, but you can play catch-up with a 529 college savings plan, offered in every state. You get tax-deferred earnings and tax-free distributions for qualified higher-education expenses. Plus, 529 contributions are often deductible from state income tax. Since the plans offer higher contribution limits than Coverdells, more than $300,000 for some, you can start saving with a 529 later in the game, or get way ahead if you choose this option when kids are younger.
High School: College is just around the corner. Time to check out financial aid opportunities. For tax reasons, parents have often opened savings accounts in their kids' names.
But, Ginny Hazen, director of financial aid for Dartmouth College, points out that federally funded scholarships are hard to come by. Try to reduce college cost with grants. Ask school guidance counselors about sometimes hard-to-find local grants. To learn about federal grants and aid programs, visit studentaid.ed.gov.
College-Bound: Once you know where your child's been accepted and what the aid offers are, compare them and ask for more, says Alex Weiner of the consulting firm Collegewise and the website getcollegewise.com. "I would say, 'My daughter really wants to go to your school, but XYZ offered us a better package.' Give them the details," he says.
"The worst the administrators can say is 'no,' but often they will match the offer or meet you partway."
You may want to let them know about extenuating circumstances, such as unpaid medical bills, legal or business debts, and prior educational expenses. If you're still short of funds after your savings and aid package, turn to loans.
Federal Stafford loans and Parent Loans for Undergraduate Students currently have low, capped variable rates. But be aware that these rates are adjusted — up or down — on July 1 every year.
A third federal program, Perkins Loans, is for the most financially needy students. When borrowing from any institution, look for the lowest possible rate.
Freshman Year: Don't hesitate to ask Junior to step up. While some parents worry that working during college will eat into study time, results from a poll conducted by Robin Raskin, author of "Parents' Guide to College Life," suggests it doesn't seem to hurt grades.
Parents and students should decide together how those proceeds should be used. The college deans surveyed, however, recommend not working the first term of freshman year and limiting work hours to 15 per week.
What's more, summer jobs bring in cash that can go toward books or room and board.
A Lesson in Loans
Finance Columnist Liz Pulliam Weston recommends loan payments should not exceed 10 percent of the expected monthly gross income in the student's field — a good guideline once your child declares a major.
By that rule, an education major that lands a teaching job paying $30,000 per year has a monthly gross income of $2,500 and should generally keep maximum student loan payments around $250 a month.
How much to borrow? While student loans are a low-cost way to fund tuition and ensure your children do their part, they can saddle them with so much debt that they are mortgaging their future. If applying for federal aid, you must fill out the Free Application for Federal Student Aid. It's easiest to complete the form online at fafsa.ed.gov.
Give and Take
A USAA-sponsored 2005 study, "Freshman Finance 101," found that 79 percent of college-bound freshmen had not received any budgeting or financial advice from their parents or anyone else. And once students get there, most schools make it easy to run up bills with swipe-and-go systems tied to student IDs or prepaid spending cards. The cashless campus is convenient, but experts say that never having to pay cash makes students much worse at budgeting. Robin Raskin, author of "Parents' Guide to College Life" and mother of three, put her son on a budget. "We finally got smart, but he has a thousand reasons why he always runs out of money," she says. "You have to decide whether to stick to your guns. It can be really hard when they are starving." Her research has shown that many students unknowingly spend a fortune on high-priced coffees and fruit smoothies, since they never see the bills.
Give them some credit — or should you?
"Kids are besieged with special credit card offers on campus," warns college parenting expert Robin Raskin. "Some students end up with 10 cards all maxed out. About 50 percent of incoming freshman have a credit card; 96 percent of graduating seniors have at least one."
A family card lets parents see expenses and makes sure bills are paid on time.
But a student's own card can help him or her build a good — or bad — credit history. If your child goes solo, get a card with a preset low limit, help set payment schedules, and have a frank discussion about debt and interest rates.
Use an online calculator, like the one at usaa.com, to figure future college costs based on your child's age.