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How to Save for College: The Definitive Guide

You have been nurturing your children throughout their education. You watched him or her struggle to read, master multiplication, and write that first paper. But you also taught your child how to get up with an alarm clock, develop some level of organization, and be accountable for their work and actions.

And now it's time for college, where your child will take every tool and skill and bit of advice that you have given them and put them to the test. You've done your best to prepare them for a life outside the family bubble, and you have seen them develop their own interests. Your child has goals, and you can help him or her achieve them by helping to finance their college education.

Saving money in general is difficult. Saving money for college—that's a financial challenge that can seem nearly impossible to conquer. Freshman year of college can seem so far away, especially when days filled with potty training and playdates seem to pass by so slowly.

However, saving for the good of your child's education, or your own, is an absolute necessity. Just consider these scary stats from The College Board's Trends in College Pricing Report:

  • The average cost for a public, four-year undergraduate degree program has risen by 9 percent over the past five years.
  • The cost of tuition has gone up 13 percent for private institutions.
  • Students (and/or their parents) can expect to pay about $9,650 a year for public in-state tuition.
  • Tuition is about $33,480 annually for private, non-profit universities.
  • These numbers don't include room and board, which can cost about $10,440 at a public in-state college.

All considered, the average cost can be over $20,000 a year for in-state tuition and room and board! That's a scary number, but it's not an impossible one to finance, especially if you start early.(Not to freak you out further, but according to CNN Money, it costs $245,000 to raise a child to the age of 18, which doesn't include college.)

For the majority of families, college can seem like an insurmountable expense. But ignoring the high costs doesn't make them go away.If you have college-bound children, or if you are aiming to invest in your own education, then saving for college should be part of your financial plan. Perhaps you're thinking, I know! But knowing and doing are two different things, right?

Saving money for college is an achievable goal

Even if you believe you should start saving for a future education, like many, you might not think you can or just don't know where to start. Here are some of the most common concerns:

  • How much will college actually cost?
  • Where is this extra money going to come from?
  • Can my meager savings even make a dent in the steep tuition increases that show no sign of slowing?
  • Isn't it just easier to worry about the expense when the time comes?

On the positive side, there are always student loan options available, federal financial aid, and college scholarships and grants. Nearly 85 percent of undergraduates at four-year colleges received some form of financial aid for the 2012-2013 school year, according to the National Center for Education Statistics. And school debt is actually "good debt," especially for young people who are working to establish a good credit score, as NerdWallet explains.

But while the majority of students get some sort of financial aid, you can't rely on what may or may not be available to college students years into the future. Plus, students who rely exclusively on loans to pay for college are graduating with a hefty burden.

Remember: Loans are not free money—they must be paid back eventually. If federal “aid" is not a grant or a scholarship, it's borrowed money.

Scholarships are great, but...

While there are undoubtedly scholarship opportunities for your child to pursue through their high school, college of choice, or community organizations, scholarships are usually only a drop in the bucket when it comes to minimizing the cost of college. Scholarships are worth it, but scholarships plus savings are a far better scenario.

That's why you should start saving for college now. Saving is an action that you can control and adjust as needed, while still working toward achieving an admirable goal: saving your child from too much debt.

Get informed, make a plan, and stick to it

Saving for college doesn't have to be overwhelming or mysterious. Building your own savings in the bank is a reality that can be achieved in a stress-free way by:

  • Understanding why you should save money for college
  • Knowing when to start saving
  • Determining the smartest method for saving
  • Deciding how much to save
  • Figuring out where extra funds are going to come from
  • Knowing how to work the system to your benefit
  • Not being afraid to ask others for help and support

This may seem like a lengthy list of goals to check off, but once you do, you'll be able to add college savings to your budget. Even better, you can earn interest on what you save, and grow your college fund well before the first financial aid applications are due.

The earlier you start, the better, but don't despair even if your kids are older.

This simple stress-free guide to saving for college will help break down the small, but doable, steps you'll need to take to invest in a big future.

Table of Contents:

Chapter 1: Learn how to save for college (and not get penalized for it!)

Chapter 2: Understand why it's never too late to start saving for college

Chapter 3: Get introduced to the three smartest ways to save for college

Chapter 4: Discover how much money you really need to save for college

Chapter 5: Unlock the secret to saving for college while living paycheck to paycheck

Chapter 6: Get the scoop on how to beat the system

Chapter 7: Find out where you can go for help

Saving for college 101

Chapter 1: Learn how to save for college (and not get penalized for it!)

You've undoubtedly wondered whether it's worth the effort to save for college if you can't even put a dent in the amount of money that school will cost. Won't any obvious assets just hurt financial aid eligibility? What if your child doesn't even end up going to college?

All of your concerns are valid, but when it comes to college, even a little bit of savings can go a long way.

Get cozy with the rules of FAFSA and its buddies

There are ways to save money for college, and still qualify for financial aid–you just have to familiarize yourself with the rules. Not every savings effort is penalized when it comes to the awarding of financial aid. Schooling yourself on the particulars of the financial aid process can help you maximize your savings. Here are the first two important acronyms you need to get familiar with:

  • FAFSA (Free Application for Federal Student Aid: the form that needs to be completed while applying to college to see what kind of federal aid a student qualifies for in the way of loans and grants.
  • EFC (Expected Family Contribution): This is the amount of money you, your child, or generous grandparents will be expect to put toward financing this particular education. The financial information that you provide on the FAFSA is used to calculate the EFC. The higher your EFC, the less financial aid you can expect to receive.

Support your child by saving

Hands down, the biggest barrier to attending college for many families is the cost–something that building ample college savings can alleviate. According to a survey by the College Savings Foundation, not wanting to accumulate student debt was the leading reason that students considered not attending college. Sixty-two percent of students in the same survey said the cost of college had made them re-consider attending college at all. However, children with college savings accounts were seven times more likely to go to college, according to the Center for Social Development at Washington University in St. Louis.

Your children have gone through their lives being supported by you, their parents. College is the first time they may be completely on their own, but that doesn't mean you can't help support their goals. You can help your child achieve as much as he or she can achieve by saving as much as you can to finance their college education.

Spend or save now? The answer is simple

Ultimately, saving is better than not saving. The variables are many when it comes to how much federal assistance you will have when college application time rolls around, and your child's choice of college will affect it as well. And that's simply something you cannot predict right now. And, there is no guarantee that the aid being offered will be significant.

Sock away any amount of money you can now. Any savings you can accomplish will help reduce the debt load and bring your student that much closer to achieving his or her college dreams.

Chapter 2: Understand why it's never too late to start saving for college

Saving money is a conscious and deliberate decision. Where you choose to allocate any extra funds matters. When time is on your side—and even when it is—modest savings can add up to something tangible. Even though the undertaking may seem so far away when other matters and needs are more pressing, one day, you'll be thrilled that you made the sacrifice to sock away cash for college over the years. And the sooner you start stuffing the piggy bank, the better.

Start saving from day one (take "Rob," for instance)

When you bring that tiny baby home from the hospital, probably the last thing on your mind is paying for college. Except, of course, in the case of Rob, who opened a 529 College Savings Plan—which is similar to an IRA but specifically intended for college savings—for each of his two children within days of their births. Take a look at how he organized his saving:

Save early, save often, save a little, save a lot

The earlier you begin to save for your child's college education, the happier you will be later. Not only does it feel good to see that ball of change growing over time, you also have the advantage of making the most of potential growth from compound earnings in specific college savings plans.

If you don't have any college funds set aside, start now. As Kristen Kuchar explains on The Simple Dollar, “The simplest way to start saving is to make it easier on yourself. See if you're able to automatically deposit a portion of your paycheck into a 529 college account or any savings account."

Not seeing the money or feeling its absence will make the saving easier. Use the safety 20 in your wallet or the change in your pocket, just don't be static. Make the first move and you'll be in motion. Dollars and cents add up as long as you give them the opportunity to do so.

Chapter 3: Get introduced to the three smartest ways to save for college

Once you finally make the decision to save money for college, the next question is: Where should I put the savings? Ideally, you to be financially aggressive and open an interest-earning account.

Most viable college saving strategies

There are plenty of saving options dedicated to covering college expenses. While Roth IRAs, CDs, savings bonds, and even trusts are options for paying for college, it's up to you to determine what works best for your needs.

Here are three of the most common and financially smart saving strategies for college. As Hal M. Bundrick, CFP, from NerdWallet puts it, “The right answer for you may be a combination of different accounts."

1. 529 college savings plan

The most popular and often the most recommended option, 529 college savings plans can be used at any institution that accepts federal financial aid to use toward college tuition, books, and other qualified education expenses.

Depending on how involved you want to be in the growth of your 529 plan, and depending on which broker you select, you can choose a portfolio that's hands-off and automatically managed for you. The investments typically become more conservative as your child gets closer to college ago. If you're a savvy investor, you may opt for a 529 plan that allows you to choose your own portfolios.

Mark Kantrowitz, national leading expert in financial aid for college, and publisher and vice president of strategy for Cappex, a college planning firm, calls 529 college savings plans the best way to save for college. "They provide both tax and financial aid advantages. Earnings accumulate on a tax-deferred basis and, if used for qualified higher education expenses, are entirely tax-free."

You can enroll in your state's 529 plan or in another state, if you are so inclined. Do your research and look for a plan that boasts:

  • Low annual fees
  • Reasonable contribution limits
  • The ability to make changes to your account
  • A good return on your investment

SavingForCollege.com has an easy comparison tool for all 529 plans. Plus, a nice element of a 529 is that if the child you have established the fund for suddenly decides that higher education is not his calling, the beneficiary of the plan can be easily switched.

2. Coverdell Education Savings Account

A Coverdell Education Savings Account offers numerous investment options and tax-free investment growth. The Coverdell ESA is slightly less popular than a 529, however, because there are income-based contribution limits, as well as annual contribution limits. Because all account contributions must be made before the beneficiary turns 18, the $2,000-a-year cap may not be worth the effort for same families.

The funds in a Coverdell ESA must be disbursed before the beneficiary turns 30 years old. You may think your child will be long out of school by that age, but graduate school plans or years off of school for travel or growth could impact the usefulness of the fund and incur penalties and be taxed.

3. Prepaid college tuition plan

The name says it all. A prepaid college tuition plan lets you pay for parts of your child's college education now at current tuition prices, and gains in the plans are usually exempt from federal taxes. This move protects you from inevitable tuition increases, especially if your child is very young and years away from going to college.

Think about it: The current tuition is $10K per semester at Your College of Choice. If you make a $5,000 contribution now and the tuition doubles by the time age 18 rolls around for your kid, you've paid half of the bill already instead of just a quarter. Not every state offers prepaid tuition plans, and some are closed to new enrollment, so do your research carefully with this option.

You must also be aware that only certain colleges participate in prepaid college tuition plans–and some are limited by the state in which you reside, as U.S. News & World Report explains—so with this investment option you are limiting your child's college choices before they even begin thinking about higher education.

Every family has different needs, requirements, and goals when it comes to saving for college. The bottom line is that there are plenty of saving options available, many that give you a return on your investment. Your money won't just be sitting; it will be gaining interest. Think of investing in college savings the same as you would a stock or piece of property – you have to give a little to get a little (or a lot).

Chapter 4: Discover how much money you really need to save for college

There is plenty of advice to be found from sources like Time and SavingforCollege about how much you should try to save to pay for a college degree, whether your child's or your own. Depending on the financial advisor you consult, the answers will vary, and of course your personal financial situation will be taken into consideration.

Saving even a little bit over the years will provide relief when it comes time for college to begin. Even a small nest egg will prevent you from the stress of having to come up with money all at one time to finance a college education.

The amount you save is arbitrary—just do it

Financial advisor Kevin McKinley from Eau Claire, WI, offers a simple formula for families who want to put together a college savings goal:

“Save a quarter of the cost over a child's first 18 years. Pay another quarter out of current income over the next four years. Borrow the rest. Split among the family."

Here's how it would work:

  • Let's say it costs $20,000 for a year of college.
  • And, for the ease of math, let's say it costs $10,000 each year to raise the child. (The average is actually much higher. According to CNN Money, it costs $245,000 to raise a child to the age of 18, which doesn't include college).
  • Take 25 percent of $20 ($5,000) and put it into a savings plan like a 529 each year.
  • For the four years the child is in school, take 25 percent of your current income and apply it to their costs.
  • Borrow, beg, or steal (well, not really) the rest to get the remainder of the annual college costs.

Kantrowitz has a similar strategy and rationale: “Parents should aim to save about one-third of future college costs. Like any major life-cycle expense, college costs can be spread out over time. Figure that one-third of the cost will come from savings, one-third from current income when the child is enrolled in college, and one-third from future income (e.g., loans)."

Keep in mind that every type of savings program will have parameters to follow (or at least recommendations), such as contribution minimums or limits. However, very few families reach their 529 plan's cumulative contribution limit, which is usually about seven times the current one-year cost of attendance for colleges in the state, says Kantrowitz.

Dedication is one of the biggest keys to saving for college, above all. If direct debit is available for a college savings plan, jump on this option if you can swing it–knowing that money is coming out of every paycheck or once a month will simply become routine. You won't count on that income for anything other than being reserved for college savings.

Every little bit counts

It may feel like an absolute impossibility to save for college given your family's tight budget or household expenses. But, truly, even a few dollars here and there can make a difference and choosing a low-fee plan (many have no enrollment fees) is a great start. If you feel like you need to know now how much you will need to be able to contribute to pay for your child's college education, a college savings calculator can help.

If you can gradually increase the amount you save for college when your income increases, even better.

Chapter 5: Unlock the secret to saving for college while living paycheck to paycheck

Your biggest concern is most likely how you're going to adjust your already tight budget and squeeze college savings out of it. Short of taking on a second job or trying to get a higher-paying position, meticulously and honestly reviewing your monthly expenditures is exactly what you have to do so you can begin to figure out where you can cut corners.

Be honest with yourself

Where to start? Your credit cards are a good jumping off point. Financial adviser McKinley suggests asking yourself if you would rather help your child go to college or keep buying the items or doing the activities that are itemized on your credit card bill.

As McKinley told The New York Times, “I don't judge what people choose to spend money on," he said. “But most people with kids going to college wish they could go back and change what they spent, because a lot of it was on things that didn't have any value in the long run."

What you want to do, of course, is set realistic targets for college savings. “Break up the college savings goal into monthly contributions. Using smaller steps will make the challenge seem more manageable," says Kantrowitz, who began saving for his children's college education before they were born. “If your child born this year will be enrolling in an in-state, public, four-year college, save $250 per month. For an out-of-state public school, save $400 per month. For a private non-profit college, save $500 per month."

Of course, savings goals are all relative; you shouldn't jeopardize other priorities in the process, such as retirement savings. Whereas, the daily gourmet coffee that you charge to your credit card could go by the wayside with little consequence. Consult a financial advisor if you're feeling completely stuck or to help you determine what's realistic for your income, expenses, and savings for retirement, college, and more.

Have faith in your ability to save

Your family will go through different scenarios over time that will limit the availability of funds or free up money that was otherwise spoken for. Consider a one-child family that has just moved their child out of daycare and into kindergarten at a public school. Suddenly, that daycare money is available. Sure, it would feel amazing to relieve some pressure on your monthly expenses, or see an extra movie or two, but allocate that money (or at least some of it) into a college savings account right away and you won't miss it.

Chapter 6: Get the scoop on how to beat the system

Saving for college can be looked at as a burden, obligation, responsibility, or measure of generosity. Your viewpoint on the matter may change from month to month, and that's OK. One thing that will likely never change is wondering whether there is anything you could be doing to improve the ultimate tally of college funds, and still qualify for financial aid.

Shield your savings

It is possible to cloak some of your assets from being included on your FAFSA application. FAFSA's federal asset protection allowance chart from Federal Student Aid allows people to shield a portion of their non-retirement money through a savings and asset protection allowance.

The four biggest takeaways:

  • Only 5.64 percent of a parents' assets are taken into consideration as available money to pay for college.
  • A whopping 20 percent of a student's assets are taken into account when it comes to the EFC.
  • Depending on a parent's age, they have a set allowance about what assets can and cannot be counted toward the EFC.
  • Always earmark college-related assets in a parent's name or in a parent-child name together to make sure that only 5.64 percent of available assets are counted as available college funds.

While it may feel like colleges and universities are aiming to milk you for every penny you've got, they're actually not that evil. No one wants to snatch your retirement out from under you.

“Parent assets and student/parent-owned 529 plans are assessed on a bracketed scale, with a maximum rate of 5.64 percent," says Kantrowitz. Comparatively, a flat 20 percent of a student's assets (from checking accounts to investments in a child's name) can be counted as available funds to pay for college.

It's always the smart move to have college-dedicated assets categorized as parental assets to give you the best chance of qualifying for a generous amount of financial aid. Here is an example:

  • Let's say that in a married couple, the oldest parent is age 52. He or she is eligible to shield up to $20,700 in non-retirement assets.
  • If you have $50,000 in assets and subtract the allowance, that would leave you with $29,300.
  • Multiplied by 5.64 percent, that would result in $1,652 that can be counted toward a college-bound student's EFC and represents the amount that you would be expected to pay for one year of college.

Peanuts, right? The Education Savings and Asset Protection Allowance protects you from missing out on financial aid opportunities because you've saved “too much."

How assets affect financial aid

It's one thing to worry about whether or not you've saved enough money for college. But it's also important to remember that your investments also factor into determining whether someone qualifies for financial aid.

You may also be tempted to start shuffling assets around in order to have FAFSA look on you more favorably, but income matters more than assets for FAFSA. While retirement accounts are not reported on the FAFSA, if you opt to withdraw funds from a Roth IRA to pay for college, this may count as income and affect financial aid eligibility.

On the plus side, “Thirty-five states and the District of Columbia offer state income tax deductions or tax credits on contributions to the state's 529 plan. That makes them superior to a Roth IRA," says Kantrowitz. “529 plans that are owned by a dependent student or a dependent student's custodial parent are treated as a parent asset on the FAFSA, yielding a more favorable impact on eligibility for need-based financial aid."

Maintain good intentions, and good savings goals

Ultimately, you have to be honest about the assets you have so that your family's financial aid package is created fairly. What you can do, of course, is your homework before you begin saving for college so that funds go into the right places with minimal penalties. That is the biggest way to beat the system – review your savings options and choose wisely.

Chapter 7: Find out where you can go for help

When you accept the reality that you simply cannot finance every dime of a college education by yourself, a world of options will suddenly appear. This is a think-outside-the-box moment, and it's also a look-outside-your-own-wallet moment.

Make the tough requests

In a survey conducted by the College Savings Foundation, 51 percent of parents said they are asking family or friends to contribute to college savings rather than purchase material gifts. Grandparents especially are helping out, not only because it aids their grandchild, but it can be a benefit for their estate and gift tax liabilities. Individuals are able to give $14,000 in financial gifts annually to a 529 plan per beneficiary without paying a gift tax, according to the IRS. Anyone, in fact, can contribute to someone's 529 plan.

And, in case you weren't aware that there is a gift card for everything, GiftofCollege is a gift registry for college savings plans that lets friends and family contribute easily online or with physical gift cards for deposit directly into any existing or newly begun 529 plan or student loan account.

You can also ask your college-bound child to make some sacrifices, like going to a state university rather than a private college. Twenty-three percent of College Savings Foundation survey respondents are on this wavelength. Another strategy a quarter of families are using to reduce college costs is to have their child attend a community college, then transfer to a four-year college.

Look for options

Kids can earn money too by working full-time in the summer and part-time during the school year—a college-age child could earn thousands annually to contribute to their own educational pursuits. According to the College Savings Foundation, college-bound students want some of the burden anyway. Eighty-nine percent of high school students said they would definitely or possibly help fund their own education.

Help is available, if you look for it, ask for it, and be thankful for it.

Saving for college 101

The idea of saving for college is daunting, but it is not impossible. Everyone can set aside a dollar here or there and, over the years, the money will add up. It may only pay for some textbooks or a semester of room and board, but that will reduce your child's debt burden.

If you're wondering if your peers are saving, Sallie Mae's “How America Saves for College 2016" study discovered that more parents (51 percent) were creating a plan to pay for college in 2016 than in 2015 (42 percent). And more good news: Parents who have a plan are able to save significantly more for college–over $18,000, on average.

The idea of a $250,000 education can be paralyzing; set attainable goals instead. “If you try to save the full sticker price, you will probably suffer from sticker shock," says Kantrowitz. “College costs increase by about a factor of three over any 17-year period."

Assess the needs that you have:

  • Will you be sending one or more children to school?
  • How much time do you have to save before a student begins applying for college?
  • Will the school of choice be in-state or out-of-state? Private or public?
  • Is graduate school part of the equation?

Answering these questions can help you understand the projected costs for a college education. From there, you need to decide what percentage of the tuition and costs you are willing to pay. Knowing what money you're willing to cough up will inform the goal you set and help you determine where to go from here.

Still, most college grads believe that their investment in higher education was worth it, according to Pew Research Center. And, believe it or not, it's costlier to not go to college than it is to go to college, since millennials with only a high school diploma are far worse off than their counterparts in earlier generations.

Paying for college is one of the biggest financial obligations you will take on in your lifetime, but saving early and often can help. With the resources, knowledge, and insight you now have at your fingertips, you can make a plan, earmark the funds, and start saving.

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