Money Essentials

College savings strategies

If you save early and wisely, college may be affordable after all


Few people question the value of a college education, but the cost is enough to break the bank for a lot of families. With the cost of higher education rising faster than inflation, parents of today's 4-year-olds may face college bills of more than $200,000 - and that’s for a public college! Private universities are more like $400,000.

Sure, the numbers are scary. But if you start saving regularly while your child is in diapers, you'll put yourself in a good position financially by the time your son or daughter is ready to hit the co-ed bathrooms. (For help in setting up a savings plan, try our College Planner.) Also, don't forget that the availability of financial aid, loans, and education credits and deductions means you may not have to foot the entire bill yourself.

Indeed, you shouldn't if you're short on retirement savings. As a parent, you might think your most important financial duty is to pay for your children's education. You'd be wrong. Saving enough money for your own retirement is even more crucial.

Your children have a lot of resources besides you to help feed the tuition monster, but no one is going to help you finance your golden years. And, you don't have to worry that socking money into a 401(k) will be held against you if you apply for financial aid. Formulas used to assess need generally don't consider retirement savings as an available asset when determining how much parents can contribute to tuition.

Putting too much money in your child's name, however, might work against you. While it's true that a child's income is usually taxed at a lower rate than a parent's income, keeping funds in a child's name can reduce your financial aid package. Colleges use a formula for aid that assesses a family's need based on up to 5.64% of parents' available assets and on 20% of assets in a child's name or custodial account.

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