New Math on College Tuition

When the stock market started to tumble, many Americans became obsessed with their dwindling retirement accounts. How were people, particularly those in or near retirement, ever going to bounce back?

But if you're a parent, you've likely had something else on the brain as well: college savings plans. Unless you've been investing much more conservatively than most experts were advising—including me—you've taken your lumps in your 529s and Coverdells. I know I have.

An OppenheimerFunds study found that, while 90 percent of parents view sending their kids to college as an essential part of the American dream, nearly half have saved less than $5,000 to pay for it. About 60 percent strongly believe if tuition costs keep rising, college will be unaffordable for most families.

As a parent of two kids rapidly approaching college age, I know the numbers are daunting. How do you keep up with your savings when the economy and the stock market seem to be working against you?

Talk to Your Kids
If you're like most parents, you feel like the onus of sending your kids to college is entirely up to you. While that's partially true, there's no reason your children can't help beyond student loans, which many grads carry these days. I mean sitting kids down early on and discussing what they can do to pitch in.

"Kids should know that they're going to have to make some contribution and that, if they study hard, they may have a chance to earn grants and scholarships. The more things they can do to help get themselves into college—extracurricular activities, community service, great grades—the better," says Donna Winn, an OppenheimerFunds exec.

In high school, they can get a weekend or part-time job and earmark some money for college.

Aim for One-Third
Most parents don't pay for all of college these days—they simply can't. But parents tend to feel better if they can make a significant contribution. I suggest splitting the pot into thirds. You're doing well if you can save one-third of your child's tuition before school, tell them to plan on borrowing one-third and—assuming you're doing okay at the time and are satisfying your retirement savings needs—consider paying the rest while they're in college.

The 529 Advantage
In these plans, contributions are made with after-tax dollars and money grows tax-free. This is particularly lucrative if your kids are younger, because your money will have a lot of time to take advantage of the tax-free accumulation.

Use a Roth IRA
If you're torn between adding to your kid's education account and your retirement account—and what parent isn't—a Roth IRA is a good compromise if you're eligible (your adjusted gross income must be less than $166,000 if you're married and filing jointly, or $114,000 if you're single).

"What a Roth IRA does is allow you to save for college or retirement at the same time. Money in this account isn't assessed for financial aid purposes, and you can always access your [savings] penalty- and tax-free," says Tim Higgins, author of Pay for College Without Sacrificing Your Retirement.

Smart Consumer
Since picking a college is a buying decision, try to drive down the cost as much as possible.

Too many students miss their chances at aid and scholarships because their parents think they make too much and would never qualify. But you don't know until you apply. Fill out the Free Application for Federal Student Aid and see what you're offered. 

Tips for finding the best loans and financial aid options 

The step-by-step guide to paying for college

How much do you need to save? Use this calculator to find out!