How to Plan for College Costs

Make no mistake: A college education pays big dividends. Studies show that college graduates earn roughly twice as much as high school graduates. Give your child this opportunity by starting your college savings program today.

Instructions

Difficulty: Moderate

1. Start saving as early as your child is born: The sooner you begin, the more money you'll accumulate. Setting mini-financial goals is as important with a college savings plan as with any long-term savings plan. First calculate how much you will need to save, using your child's age as a yardstick. Then craft an investment plan (get a financial adviser to help), and stick to it like a barnacle on the hull of a ship. See 228 Design a Savings Plan.
2. Invest in higher-risk investments such as growth stocks when your child is very young and time is your ally. You can handle some bumps and pitfalls along the way and still have time to make up ground. Stocks have historically offered the best return on an investment dollar. When college is two or three years off, start to conserve (or "lock in") some of your gains by placing a healthy chunk of your college fund into lower-risk bonds, bond mutual funds or money-market funds.
3. Review financial aid packages for your income level and asset portfolio to estimate a baseline target for savings. FinAid.com and Kiplinger.com offer tools to estimate your contribution. According to the College Board, the current one-year cost of a four-year public college is about $9,000, while the cost of a fouryear private college is around $24,000, with a 4 percent annual increase. Use those numbers as a measuring stick to estimate your expected contribution.
4. Launch a college savings campaign. When family members and friends ask what to get your child for birthdays or holidays, ask them to contribute to his or her college fund. Good gifts include Series EE Savings Bonds, stock or mutual-fund shares steered through the tax-friendly Uniform Gifts/Transfers to Minors Acts (UGMA/UTMA), and Coverdell Education savings account (formally known as an education IRA). Cash and checks work just fine, too. Also note that grandparents can pay a child's tuition without any gift-tax penalties.
5. Invest early through one of the many state-sponsored 529 tuition programs to lock in tuition at any college within a certain system (state universities, for example). You can open a 529 plan when your child is born and guarantee tuition fees 20 years from now at today's rates. All profits from a state-sponsored prepaid tuition plan are tax-free as long as the withdrawals are used for a "qualified educational expense" as defined by the IRS. Beware--if you use these funds for an out-of-state school, they may be taxed.

Tips & Warnings

• Look for more tips on SavingsForCollege.com and Morningstar.com.
• Capitalize on any tuitionprepayment discounts. Many colleges and universities make it worth your while to pay tuition costs early (in some cases as soon as an infant has a Social Security number), with discount programs of up to 10 percent of the total tuition package.
• Make saving for college a part of your overall household savings plan. It doesn't have to be much; even $50 per month can add up in premium and interest over the years.
• Choose your college savings plan wisely. Some allow you to deposit more than $200,000 tax-free, while others limit the amount. Look into how a plan invests its money. Some managers buy mutual funds; others, certificates of deposit. Be sure to get details about how the plan has performed in the past.
• A 529 college savings plan is also tax-free and more flexible that its related 529 tuition program (see step 5). It can be applied to any qualified educational program in the United states.