Saving for College
No wonder parents surveyed recently said paying for college was their number one fear—ahead of terrorism, crime and violent video games. Unfortunately, that fear seems to be paralyzing them from taking action. How do we know? Because even with these gigantic numbers, a recent study by AllianceBernstein Investments found that half of parents surveyed spent more money on vacations in the past year than they saved for their kids' college fund. What's more, 58 percent of parents in the survey spent more dining out or ordering takeout. Why? Inertia, confusion, unrealistic expectations and any number of other reasons, says Jennifer DeLong, director of college savings plans at AllianceBernstein.
That doesn't mean parents don't want what's best for their kids. In fact, when it comes to college savings, parents often make what I consider a huge mistake—they put their kids before themselves and save for college before they've maxed out on their retirement savings.
I've said it before and I'll say it again: Retirement should not take a back seat to college. Remember, while there's no financial aid for retirement, there is a lot of financial aid for college. And you simply cannot borrow for retirement like you can borrow for college. So take a hard look at your spending and see if you've got your priorities in line, then max out your 401(k) and other retirement plans. After that, you can figure out how much you can contribute each month to college savings.
Let your Money Group and the following guide help. You'll find key questions that you and your group members need to ask yourselves to help get serious about college savings. There's also a college savings calculator to help you calculate future costs and what you'll need to save, as well as three tasks that you and your group can work on this month to make college savings a reality.
- What do you worry about more—saving for retirement or saving for your kids' college education? (Jean's take: As rational adults, we understand from a dollars-and-cents perspective that we should save for retirement first. But as parents, we aren't quite comfortable with it—it's our responsibility to take care of our kids and give them a good start in life. Just imagine how you'll feel if your kids have to bail you out in your old age because you didn't put enough away for retirement.)
- If you added up how much you spend on vacations and eating out, would it amount to more than you save for college? If it does, can you make some changes?
- If you attended college, how did you pay for it?
- What responsibility do you think your child has for paying for college? (Jean's take: When you are just starting the college application process, it's key to sit down with your kids and talk about how much you have to contribute toward college and how much will have to come from aid. Explain to them the difference between the cost of public and private schools—and what that will mean to them when they graduate and have to start repaying loans. Your children are not too young to think rationally about what sort of a stress loans will be on them in the future. They may surprise you with their choice of a less expensive school.)
- Do you worry about your child starting out in life with student loan debt?
- Are you expecting your child to qualify for special scholarships? (Jean's take: Be realistic. Only 1 percent of students receive athletic scholarships. While your child may have lots of wonderful talents, don't bank on them to pay the college bills. As for other scholarships, yes they are available, but your child needs to approach searching and then applying for them like a quest for the Holy Grail.)
- How comfortable do you feel about talking to your child about who is paying for college and what his or her role should be? (Jean's take: Again, as early as their freshman year of high school, talk to your children about whether paying for college will fall on your shoulders, theirs, or a combination of both. A lot of kids cruise through high school assuming there's a magic check somewhere that will cover their education.)
- If you've started saving for college, what type of accounts are you using?
- If you haven't started saving yet, what's the best way for you to get motivated?
- Who do you think can help you pay for college (grandparents, godparents, etc.) or help you make the most of the money you are saving for tuition (financial planner, trusted friend, etc.)?
- Find out what college is really going to cost you. Some parents mistakenly look at tuition costs for the year they start saving and fail to reevaluate based on inflation. Rising tuition costs are one thing you can almost always count on. Fail to take that into account, and you may have less than a third of what you need to cover four years of college, estimates Mark Kantrowitz, an education consultant and publisher of Finaid.org, a nonprofit, comprehensive site on financial aid.
- Get a fix on financial aid. Even if your children are young, you can still get an idea of how much and what type of aid you can qualify for. Paying for tuition usually encompasses several forms of aid, including loans, scholarships, grants and work-study. For more information and help figuring out what your child will qualify for, go to Finaid.org.
The good news: There are a lot of resources out there if you know where to look. Today 1.5 million students who would likely have qualified for Pell Grants—a form of federal financial aid that doesn't have to be repaid—don't even bother to apply, according to the American Council on Education. (Go to www.studentaid.ed.gov to see if your child is eligible.) And that's not all the money that's being left on the table.
A word of caution: Financial aid administrators are there to help you, but that doesn't mean they can't say no. It's their job to distribute the college's financial aid money fairly among those who qualify, so what you get could depend largely on the year and on the college. "Parents have a false sense of security that scholarships, grants and colleges themselves will help them come up with the money," says AllianceBernstein's Jennifer DeLong. What's more, 78 percent of the aid administrators surveyed by AllianceBernstein said that parents' expectations for significant merit scholarships interfered with their efforts to save. No matter what you think the future holds for your child in terms of aid and scholarships, don't scale back on your savings goals.
- Start a college savings account now. The options are vast, but 529 accounts are one of the best bets these days. It doesn't take much to start one of these accounts (minimums are low, usually around $500) and earnings grow tax-free. What's more, The Pension Protection Act finally mandated withdrawals from these accounts used to finance higher-education expenses will be permanently tax-free. In addition, some states allow you to write off your contributions on your state taxes, which can be a huge break. You must use the funds for qualified education expenses, however, to qualify for these tax breaks.
A Roth IRA is another good savings option. If your income doesn't exceed $160,000 for married couples filing jointly or $110,000 for singles, make this contribution immediately after you exhaust any 401(k) matching dollars. The Roth, unlike other retirement accounts, allows contributions to be withdrawn at any time (without taxes or penalty, since taxes have already been paid) and earnings to be withdrawn without penalty if you're putting them toward education. Essentially, it's an account you can use for retirement or college.
And don't forget the little things. Six years ago I opened an account with Upromise, a rewards program that puts money into your tax-deferred college savings account as a thank you for shopping at certain retailers. It's free money that doesn't come out of your pocket. Without even taking full advantage of the program—I routinely shop online but sometimes forget to go through the Upromise portal—I've still managed to rack up about $1,000 in my account.
*Sources for "Total College Cost:" The College Board; Standard & Poor's Financial Communications. Based on average 2006/07 costs for the type of school selected. All costs include tuition, fees, room and board, except 2-year public, which includes tuition and fees only. Projections assume a hypothetical 4 percent annual increase in costs, are for illustrative purposes only and cannot be guaranteed. Individuals may want to consult with a financial advisor about how these projections relate to their own situations.
** "Projected Savings" value assumes the user's indicated rate of return compounded annually, which cannot be guaranteed.