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Personal Finance > College  
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The catch-up college plan
It's never too late to save for tuition. Here's how to make up for lost time.
April 17, 2002: 6:05 PM EDT
By Sarah Max, CNN/Money Staff Writer

NEW YORK (CNN/Money) - This summer high school students around the country will start sending away for college brochures, touring campuses and gearing up for college entrance exams.

You, meanwhile, may breathe a sigh of relief that your son or daughter is going to college and not joining a boy band or trying to write a screenplay from your basement. That is, until the euphoria wears off and you realize that you haven't saved a cent.

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Though parents seem increasingly aware of the importance of saving for college and are taking advantage of new tax incentives, such as those tied to 529 savings plans, not everyone started socking money away the second their kids were born. In fact, financial planners and college consultants say they see families in this predicament all the time.

"I think a lot of parents start to realize the college cost issue when their kids are in middle school. That's been our experience at this firm," said Brian Orol, a CFP and president of Strategic Financial Planning Group, 529college.com, in Raleigh, North Carolina.

The situation certainly isn't ideal, but it's not impossible. "There are still a number of things you can do to minimize the burden," said Kalman Chany, author of "Paying for College without Going Broke" and a consultant who works almost exclusively with families in pre-college crisis mode.

Show me the free money

If you've just woken up to the high cost of college, the first thing you should do is determine whether you'll qualify for any kind of financial aid, and if so, take steps to make sure you get the best package possible.

Last year, $74 billion was available for financial aid, both in the form of grants, which you don't pay back, and subsidized loans, which don't accrue interest until after graduation. According to the College Board,75 percent of students at four-year public schools and 60 percent of students at private schools receive some financial aid.

Yet, far too many families make the mistake of assuming they won't qualify and don't even consider it an option. Many factors determine whether you'll qualify for aid and how much you'll be awarded, including the price of the school, the number of children you have in college at the same time and how eager a school is to admit your son or daughter.

The sooner you look into aid, the better. "Don't equate getting aid with the senior year of high school. Financial aid is based partly on income during your kid's junior year," said Chany. "That's why you really want to try to do your aid planning and be familiar with it before then."

You can get a rough idea of your family's expected contribution from the College Board's financial aid calculators or by taking a free college funding quiz at CollegeMoney.com.

  graphic  Tools you can use  
  
College Cost Finder
Moneyville
College Savings Planner
  

Just remember that your results are only estimates. To get a more precise idea of how much you'll be expected to pay you'll need to do a full-blown financial aid test. What's more, individual schools interpret need differently and have the leverage to give more favorable packages to the students they want the most. For this reason, it's important for parents and students to shop carefully for colleges, not just for the academic qualities but also for the potential for financial aid or discounted tuition.

"It's where you apply that makes the difference," said Ray Loewe, founder of College Money. He says that Ivy League schools typically award financial aid only to students with great financial need, while many small liberal arts schools try to lure top students with tuition discounts based more on merit than financial need. "If you know you're not going to get need-based aid and your child is bright you should look at mid-range private schools," said Loewe.

By knowing about financial aid early, you'll not only be able to help your student come up with a realistic college wish list, you'll be able to craft a savings plan that won't jeopardize this aid.

A penny saved is a penny not borrowed

If you've gotten off to a late start, you might think there is no chance you'll make a dent in the five-figure annual tuition costs in front of you. But that doesn't mean you should not save at all.

"The worst thing you can do is continue to save nothing," said Chany.

A little bit, he notes, goes a long way.

By saving just $300 a month for one year, for example, you'll have nearly enough to cover tuition costs for one year at a public university -- the average fees for which are about $3,754. The same savings strategy would cover more than four years of books and school supplies for your child, which average $765 per year at a private school and $736 at a public institution.

And don't forget that your time horizon for saving doesn't have to be the first day of school.

In fact, if you think you'll qualify for subsidized student loans (more on those later), your goal may not be to save for college per se, but for helping your child pay these loans once interest and monthly payments kick in after graduation. "My wife paid for law school with subsidized loans," said David Tysk, a senior financial advisor with American Express Financial Advisors. "The whole time she was in school she was able to save money at 6 percent [in an interest-bearing account] while her loans were costing nothing."

To make room in your household budget for savings, you'll want to study your last six months of expenses to see how much you spend in a given month compared with your income. Once you know where your money goes, you can look for places to cut back. Next it's time to set up a regular savings plan by having that money automatically drafted from your checking account each month.

When rebalancing your budget just take care not to sacrifice your retirement savings for your college savings. "You can always borrow for college but you can't borrow for retirement," said Orol.

If you're going to need this money in less than five years, you'll want to put it in a money market account or AAA government bond fund, says Tysk. With such a short time horizon you cannot speculate on the stock market, or even the bond market for that matter. If you have more than five years, consider investing in a conservative portfolio of stocks and bonds. For more on where to invest, try out asset allocator calculator.

Unless you're convinced you won't qualify for financial aid, you'll want to adjust your savings so as not to jeopardize your chances. And, most importantly, don't put any money in your child's name (tell Grandma and Grandpa the same). That's because when financial aid administrators create a need-based package, students are expected to kick in as much as 35 percent of their assets, while parents are expected to contribute less than 6 percent of theirs.

You could take advantage of certain tax incentives to boost your savings, but be sure to weigh the effect on financial aid. With a 529 Savings Plan, earnings are now exempt from federal income tax, and in many states contributions are tax deductible or good for tax credits. Yet the jury is still out on how financial aid administrators will factor 529 savings into their aid formulas now that withdrawals are nontaxable income.

Brother, can you spare a few grand?

Let's face it. Even if your son or daughter is exceptionally bright and you qualify for financial aid, you or your student is probably going to have to take on some debt. Even the most generous financial aid packages include some loans.

"The good news is that college loans are as cheap as they've ever been and they're tax deductible for some people," said Loewe.

The most desirable loans are awarded with financial aid, are put in the student's name and are subsidized by the government. With Perkins loans and subsidized Stafford loans, no interest accrues while a student is in school and payments don't start until after he or she graduates and gets a full-time job. Interest rates on these loans are capped at about 8.25 percent and are currently around 6 percent.

Often students who apply for financial aid don't qualify for the subsidized loans, but do receive unsubsidized Stafford loans, which do accrue interest during school but still have more favorable interest rates than those issued by commercial banks. PLUS or Federal parent loans for undergraduate students are also preferable to bank loans.

According to Orol, many individual states also offer education loans at below market rates. To see if your state has programs, contact its treasurer's office. The National Association of State Treasurers has links to each state.

Individual colleges also offer loans, of course. Just be sure you scrutinize the terms as you would any other loan. While some schools have excellent lending programs, others, says Chany, charge interest rates that are on par with credit cards.

If you don't qualify for any of these loans or find it's not quite enough, consider a home equity loan first then look into a bank loan designed specifically for education.

While you're looking for ways to come up with money for college, be sure to keep your student involved in the process. Would-be college students need to know that they may be graduating with student loans (consider it a right of passage into adulthood) and that good grades, SAT scores and clever personal essays can have a huge impact on the real price of college.  Top of page






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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.