Send Your Kid to College Without Going Broke

There are as many ways of saving for higher education as there are majors at college. Here are a few of them:

The Head-Starters. Three-year old Jake is lucky his mom is in the financial planning business. Melissa, a New York City fi nancial adviser, and her husband set up a 529 college savings account for Jake two weeks after he was born, which has since grown. With tuition costs skyrocketing to more than $10,000 a year for the average public college and over $25,000 for the average private university, Melissa and her husband have calculated that sending little Jake to an Ivy League school in 2020 will cost well over six-figures in today’s dollars. Earnings and withdrawals on state- sponsored 529 college savings plans are completely tax- free, making 529 plans a very smart choice.

The Shifters. Donald and Pamela didn’t waste any time starting a college fund for their two children either. A few months after the birth of their first child, Rachel, the couple invested $15,000 for her in a custodial account.

They deposited the same amount in a similar account when their son, Don, was born. For Rachel, now 15, and Don, now 12, the bull market resulted in big returns in their accounts in the late 1990s. But when the market started to head south, Donald and Pamela weren’t sure their college savings would weather the market’s downturn and still cover rising tuition bills. The Florida couple decided to take $13,000 out of each child’s stash to buy contracts in the state’s prepaid tuition plan, a program designed to cover four years of future tuition and dorm expenses in today’s dollars. Donald and Pamela didn’t expect to qualify for financial aid, so they looked for other college savings vehicles with even better tax breaks. So, their next step was to move the bulk of college money from the custodial accounts into state- sponsored 529 college savings plans for more tax- advantaged growth.

The Borrowers. Joe and Pam were thrilled when their oldest son earned an academic scholarship for college, but they knew that sum would make only a small dent in his $26,000- a-year tuition bill. Joe and Pam agreed that Delaware Valley College was a good fit for Joe Jr. but it cost a lot more than they’d planned, and they wondered how they would swing it. Joe, an accounting manager, and Pam, a stay-at-home mom, didn’t qualify for financial aid, but they’ve since managed to cover his college costs with a combination of federal and state loans.

You don’t need a college degree to realize that college costs are skyrocketing.

As much as parents may wish they could foot the entire bill for higher education for their children, the rising cost of campus life could make that impossible. Ideally, when a couple decides they want to have children, they should start putting money in some type of college fund, preferably one that offers some tax advantages.

You can even open the account before the child is born. It’s even a wise idea to start when you begin trying to have a baby—if things don’t work out, and one hopes that they do, you can always use the money for a vacation, or for adult education of your own. Soon after I learned I was pregnant with our first child, I opened a 529 college savings plan, naming myself as the beneficiary, and made my first deposit. Then I changed the beneficiary to my son a few weeks after he was born, and we now contribute to our daughter’s college savings in another account as well. (Each year, my husband and I each try to contribute $5,000 to their college savings. We don’t always reach that goal, but we try. New York state offers residents a tax break on 529 plan contributions. The maximum state tax deduction for a couple in New York is $10,000.) Most parents don’t begin saving for college that soon—or that regularly. So many families will have to take out federal and/or private loans—and we may too—to supplement their college savings, if they’ve been disciplined enough to save at all.

Sharon Epperson's book, "The Big Payoff."

First step. Figure out what you’re getting into. Many brokerage houses, banks, and other financial Web sites offer online college cost predictors. T. Rowe Price’s Web site (www.troweprice.com) offers a very clear breakdown of how much money you need to save each year for your child or children based on projected tuition at major colleges and universities in the United States, and on the investment return and rate of inflation you chose.

Using the calculator, we figured out it will cost more than $1 million to send son and daughter who are just in elementary school to Harvard one day!

That’s provided college costs don’t rise more than 7% a year. We could get depressed by those numbers, but we won’t. Knowing the amount that we ultimately need to save has helped us figure out the best approach in terms of the plans we’ve chosen and how we’ve decided to allocate our investments.

To help you figure out a college savings strategy for your family, you first need to know what options are available. No matter which path you take, the key to building a college fund is to start saving as early as possible and put money in regularly. But don’t make the mistake that fi nancial advisers tell me they see all too often. Don't dump huge sums of money into college savings and neglect retirement. Remember, there’s always a chance you can get grants and loans for college, but not for retirement. The Bill and Melinda Gates Foundation isn’t going to pick up the tab for your condo in Florida.

CNBC correspondent Sharon Epperson is the author of “The Big Payoff: 8 Steps Couples Can Take To Make The Most of Their Money – And Live Richly Ever After” (Collins)