A Saving And Loan Plan For College

We all want the best for our children, of course, but giving them the educational tools to succeed doesn’t come cheap.

Indeed, if the cost of college tuition continues to climb at twice the rate of inflation, a four-year degree at a public university (in-state) will cost roughly $160,000 in 18 years. A private school will cost double that.

Yet, with careful planning, a commitment to saving and skillful use of tax breaks and low interest loans, most parents will not only be able to give their children a solid college education, but do so without sacrificing their own financial future.

"Parents often feel paralyzed when they research the costs of higher education but it is important to remember that families often do not have to pay the full cost because of scholarships and financial aid," says Cynthia Bailey, executive director of the College Board, a nonprofit association of colleges and universities. "Even as little as $25 a month will add up over time because of the affect of compounding."

Here’s a list of do’s and don’ts to consider as your budding scholar edges ever closer to the halls of academia.

Don’ts

1. Don’t panic.

College may sound unaffordable, but bear in mind that 56 percent of students today attend four-year schools with annual tuition and fees below $9,000, according to the College Board. After grants, federal tax credits and employer assistance are added in, the average undergraduate student at a public four-year school this year paid just $2,600 in in-state tuition and fees -- well below the $6,185 published price. Other forms of financial aid (federal work study, low-interest loans, grants or scholarships) can further reduce your family’s out-of-pocket costs.

2. Don’t stop saving for your own retirement

As financial planners are wont to observe, no one will give you a scholarship to fund your own retirement, but there are countless forms of aid available to help your child pay for education. Save for yourself first.

3. Don’t suffer sticker shock

If your child is Ivy League material, by all means, apply to the top schools. Many of the most selective colleges offer financial aid packages (grants and loans) that reduce their annual price tag by less than half.

In fact, Princeton, Harvard, Yale and other top universities have recently implemented "no loan" packages that replace undergraduate loans with grants, which do not need to be repaid. And they’re not all reserved for low-income families.

"It’s gotten to the point where graduating from Harvard will probably involve less debt than some public colleges," says Mark Kantrowitz, publisher of FinAid.org, an online source of student financial aid information.

4. Don’t forget lower-cost schools

If tuition at a four-year university is beyond your financial reach, consider sending your child to community college or a less expensive school for the first couple years. Students who complete general education requirements at lower-cost schools and then transfer into a larger university can cut their costs by half and still take home the same degree as their peers. Kantrowitz notes, however, that students employing this strategy should verify to what extent their credits will transfer from school to school.

5. Don’t leave tax credits on the table

The Hope credit and lifetime learning credit may help offset the cost of higher education by reducing the amount of your income tax. The Hope credit is worth $1,800 per student and is available only until the first two years of post-secondary education are completed.

The lifetime learning credit, meanwhile, is worth up to $2,000 per tax return for all years of postsecondary education. You cannot claim either credit for 2008 if your modified adjusted gross income is $58,000 or more for single filers and $116,000 or more for a joint return. The IRS has a breakdown of who qualifies for these credits on its Web site.

Dos

1. Plan early

The sooner you start saving for college the better. To find out how much you should be setting aside each month, check out one of the college savings calculators that exist online. Most, including the ones offered by the College Board and savingforcollege.com tell you whether you’re on track to reach your savings goal. The College Board’s college cost calculator, meanwhile, tells you how much it’ll set you back to send your child to the school of their choice when they turn 18.

2. Save smartly

Make sure you pick the savings plan that is best for you and your children. There are three main options.

• Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) are custodial accounts that are taxed at the child’s lower rate but come with no restrictions on how the beneficiary must use the money. If you worry your child may not use the money responsibly, consider another option.
  
• Coverdell Education Savings Accounts (ESAs) allows parents to put money away and pay no federal capital gains tax on the earnings,  if they are used for qualifying educational expenses. These plans, however, have a low annual contribution limit ($2,000) and an income cap. Contributions begin to phase out for married taxpayers who file jointly and earn more than $190,000.
  
• So-called 529s, named after a section of the tax code, are by far the most popular tax-friendly savings tools. There are two types of plans available: prepaid, which allow parents to lock in today’s tuition costs for tomorrow’s college education, and savings accounts, in which parents invest money for higher education. Earnings in such accounts grow tax deferred and withdrawals are tax-exempt as long as the money is used for qualified education expenses.

3. Maximize loans

There are three types of federal education loans that can help your family bridge the financial gap. Students can take advantage of either Stafford or Perkins loans, while parents may qualify for PLUS loans. Each come with their own restrictions, interest rates, and rules governing when that interest must be repaid.

Eligibility for federal loans is based on the Free Application for Federal Student Aid (FAFSA) form, available on the Department of Education’s Web site.

It’s wise to complete a FAFSA well before your child heads off to college, giving you insight as to what gets included in the calculation -- and a chance to adjust your financial picture for maximum eligibility.

4. Explore scholarships

With the help of online search tools, it is no longer necessary to pay a scholarship-finding service to do your legwork for you. The College Board’s Scholarship Search tool, for example, boasts a database of more than 2,300 sources of college funding, totaling nearly $3 billion in available aid. FastWeb.com also maintains a database, helping students identify scholarships that match their personal profile.

5. Talk to your child

As early as junior high school, parents should begin discussions with their child about what their educational expectations might be -- and invite the child to share his own thoughts on the matter. Many families have strong opinions about whether a child should pay part of their way, work while earning their degree or attend a specific school.

Though you may not be positioned to give your child a free ride through college (and may not want to), rest assured that whatever you manage to scrape together is a worthy investment, indeed.

The College Board notes those with a bachelor’s degree earn over 60 percent more than those with only a high school diploma. Over a lifetime, the earnings gap between a high school diploma and a bachelor’s of arts degree is more than $800,000.

"Saving any amount towards college costs represents that amount that will not have to be borrowed or financed out of current income," says Bailey.