Never too early to plan for college expenses

What parents need to know, and when they need to know it

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Look at your cute baby, and imagine the little tyke wearing a high school cap and gown about 17 years from now.

Picturing the child holding a diploma, when he or she can't even hold a rattle yet, is probably next to impossible. But that day will come. And if you are like most parents, as you watch junior walk across the stage to pick up a diploma, you will be vacillating between feelings of pride and utter fear. At that point, your child will be headed to college, and the price tag will be so shocking you'll be tossing and turning at night.

If college prices continue to climb as they have the past few years, by the time today's newborns go to college, the sticker price will be about $37,700 for one year of tuition, room and board at a state university and $98,200 at a private college, said Kalman Chany, a college financial aid consultant and author of "Paying for College Without Going Broke." For a four-year education, it will be about $161,500 at a university in your state or $426,400 at a private college, he estimates. To put that into perspective, many public colleges now run about $20,000 a year, and some private colleges are more than $55,000.

So maybe at this point you figure you will stick a bat or ball in the little tyke's hands the moment he or she can hold it in hopes they are on the road toward winning an athletic scholarship. But let's face it: That's a remote possibility. Should you despair? 

Remember, you don't need the entire sum saved for college the day junior moves into a dormitory room. And during the next 17 years, your salary probably will rise along with college costs, so the numbers won't look as shocking as they do today. In addition, low- and middle-income families don't have to pay the full sticker price if they are smart about college choices.

But if you want to make paying for college as painless as possible, you are going to have to start planning now. For the next 17 years, you will have to keep your eye on the calendar. Before children are old enough to get braces, some savvy parents start helping them build the type of resumes that will win scholarships.

Still, don't count on scholarships to do all the heavy lifting. No matter how polished your child turns out to be in high school, the chances are you will have to come up with a good sum of money yourself. So start now by saving as much as you can. Anything is better than nothing. If you start saving $100 a month for college and invest it in a balanced mutual fund that's roughly divided half and half in stocks and bonds, you should have about $40,000 by the time you pack up the car with junior's belongings and head to college.

But also make sure you have your priorities right. Too many parents — especially those laden with their own college loans — want to spare their children college debt. So they plop money into a college savings account for their children, while neglecting to save for their own retirement. This is upside-down planning.

I've heard from many parents who can't retire because they put their child's education ahead of their own savings, and their child ends up finished with college, enjoying a Wall Street or a law firm salary, and is debt-free.

The rule of thumb for saving enough money for retirement is: Start saving 10 percent of pay in a 401(k), IRA or both, beginning in your 20s. If you wait until your 30s, it's 12 to 15 percent. If you happen to have an employer that offers the typical 3 percent matching money for a 401(k), you can stash away 7 percent of your own pay and — with the free money from your employer — you will hit the 10 percent mark.

For college savings, you can make investing easy and the most profitable if you keep Uncle Sam away from taxing your savings. Plop either the $2,000 limit a year into a Coverdell college savings account, or if you can manage to save more, skip the Coverdell and use a 529 college savings plan offered by a state government. Anything you save in these accounts will be tax-free for you and your child if it goes to pay for college. Tell grandparents and other relatives about the child's 529 plan, so they can send birthday and other gifts into the college fund.

Elementary school

Maybe you've been saving diligently since you helped the little tyke blow out the candle on that first birthday cake. If you were making life easy on yourself, you evaluated 529 plans, chose one with low fees and solid performance, and you've been letting the investment experts at the plan invest your money in the manner that typically is appropriate for your child's age.

Are you satisfied with the 529 plan you chose, and the investments you've chosen within the plan? You are allowed to make changes once a year — selecting a plan in another state if you want, or different investments in the plan. Remember, you don't have to stick with the plan in your state, although many states give you an extra tax break if you do. And you can save money if you go to a state 529 plan directly rather than using a financial adviser. According to Morningstar, the average cost if you do this on your own is about 0.60 percent, but with an adviser it's 1.5 percent — a much higher amount that will detract from the amount you amass.

Say your child received $2,000 from grandma at birth. In the cheap 0.60 fund, the savings would become about $6,680 by college if the investments earned 8 percent. The same investments in the 1.50 fund would be $5,720. Try this calculator.

To identify funds Morningstar thinks are best, go to its list of best funds or check out the Saving for College website. 

As you evaluate the investments, keep in mind what "age-based" means. With that approach, the plan typically invests for you based on the child's age. Up to 4 years old, the money was probably invested about 80 percent in stocks and 20 percent in bonds. Between 5 and 10, it was probably 65 percent in stocks and 35 percent in bonds. The idea is to increase the money as much as possible when the child is young by using a significant amount of stocks. Then the closer the child gets to college, the more conservative the investing becomes so there's less chance of a loss when the first tuition bill rolls around.

You can lose money in 529 plan investments when the stock market goes down, but if investments turn more conservative along the way, you generally have time to recover by college. Many plans offer conservative investments if you can't stomach stocks. But remember the trade-offs. If you select a money market fund or CDs paying 2 percent interest, your $100 in savings a month would total less than $25,000 by the time a newborn makes it to college.

If you have been getting raises every year, consider increasing your contributions to the 529 plan — maybe setting up your account to move money automatically each payday. Also make sure you tell grandma and grandpa not to open any UGMA or UTMA account in the child's name. If your child is going to qualify for financial aid when he or she goes to college, a UGMA or UTMA will poison his chances.

Want to know if you are likely to get financial aid? For a ballpark idea, try the "estimated family contribution" calculator at the college you think your child might attend or: tinyurl.com/finaidest.

Meanwhile, now is the time to start looking for college scholarships. You might think that's crazy, but a few are available for children as young as 6. Among them: Kohl's Kids Who Care and Doodle 4 Google, an art competition that provides $15,000. Find more at tinyurl.com/finaid13.

Starting high school

Parents often don't start thinking about college until their children are seniors in high school, and college acceptances start arriving with horrific costs in them. That's tragic.

By senior year in high school, they have missed the greatest opportunities for winning scholarships and adjusting household finances so families are in the best position to maximize the financial aid colleges will give them. It's critical to get ready to seek scholarships before your child's sophomore year in high school because many deadlines arrive during the fall of that year.

If your baby had no interest in a bat and ball, you don't have to worry. Your search for scholarships will reveal that there's something for everyone who's willing to work at it — from tall children to left-handed people, bowlers and golf caddies, and David Letterman's award for average students. Find the most unusual scholarships at Unusual Aid and the most prestigious and high-paying like Intel's $100,000 at Prestigious Aid.

Two valuable scholarships sites are Fastweb.com and Scholarships.com.

Along with your scholarship search, start having your child record all activities and honors. Scholarship applications and college applications require a list of activities and references from people who saw your child excel.

Read "Secrets to Winning Scholarships" by Mark Kantrowitz and "How to Go to College Almost for Free" by Benjamin Kaplan for strategies on winning scholarships. The same strategies will also help your child write winning college application essays, and scholarships help gain admission to college.

Meanwhile, check the 529 college savings plan now to make sure investments are becoming more conservative. The last thing you want is a big loss from stocks when your child is getting close to college. According to a 2011 study by Morningstar, the average 529 plan kept only 33 percent of assets invested in stocks for a 14-year-old, and only 11 percent for an 18-year-old.

Finally, if your child's high school offers advanced placement classes and tests, you might be able to have your child master them. Eliminating a semester from college attendance would save you some money.

High school junior year

This is the most critical year if your family is going to be eligible for financial aid. At some private colleges, a family earning as much as $200,000 might get some aid. At public colleges, it gets unlikely with incomes around $90,000. To understand what's likely for you, do the "federal" calculation and the "institutional" calculation, or use the calculator on the site for the college your child adores. The institutional formula is for private schools, and moderate-income students can sometimes attend private schools for less than the school down the road because private colleges have more aid available.

If you think you will be eligible for aid, don't make the common mistakes that sabotage the possibility. The biggest mistake is keeping savings in a child's name rather than the parents', but others can include refinancing a home and saving the money for college, converting a regular IRA to a Roth, using tax strategies that appeal to your tax accountant and destroy financial aid, or selling stocks, bonds or mutual funds in your child's senior year or thereafter to pay for college.

All could result in losing grants — or free money that doesn't have to be repaid.

Before December of your child's junior year, sell investments that will pay for college. Also, go over every account in your name and your child's name to make sure the money is in the right place and won't sabotage your chances of getting grants.

Why? Because each year you want aid from a college, you will fill out what's called a FAFSA form and, at private colleges, maybe a PROFILE form too. Embedded in those forms is a quirky formula that says whether you will get aid. To make the determination, colleges will require you to submit the forms and your tax return. You want your accounts and your tax return to be in the best shape for aid, starting with the tax year that begins Jan. 1 of your child's junior year.

By that time, if you are likely to get grants, college financial aid consultants suggest you make sure college savings are in the parents' name, not the child's. They suggest that any UGMA or UTMA accounts be closed even before then. The money will be the child's but can be used by the family for items like computers, prom clothes or class trips — non-necessities. If the money is in a 529 plan kept in the parents' name, it will reduce financial aid somewhat, but not nearly as sharply as a UGMA or UTMA.

To understand the quirky formula, and make sure you aren't shooting yourself in the foot, read Chany's "Paying for College Without Going Broke." One key is that when colleges calculate what parents can use from savings, the college will assess the savings at just 5.65 percent. But a child's savings are assessed at 20 percent for public schools and 25 percent for private schools.

Imagine a student who would have received $2,500 in grants from a college based on the family's income alone. If there's $10,000 in college savings in the student's name in a UTMA account, the family could lose the full $2,500 in grants. But if instead the parents had kept $10,000 in their own names, they would have received $1,940 to $2,500 in grants. Given the quirky formula, and the same total in savings, the college assesses parents $560 a year for college at most, or 5.6 percent of savings, not the 25 percent that applies to student money.

The logic behind this is that students should pay for college with their savings. The problem is that parents usually do most of the spending for college, and most don't have nearly enough savings to pay what they must. So if families happened to do the saving in their child's name, parents will have to dig deeper to come up with the money for college.

Senior year

Now the strategy of where to apply for college becomes critical. Because public colleges have less aid to offer middle-class families than private schools, students from moderate-income families should apply to private and public schools. Affluent families might find public universities more affordable than private colleges because wealthy people won't get aid at private ones unless the student has a talent, high grades or high scores on SAT or ACT exams that are desirable at that school.

Students can get more aid from some schools based on the diversity they will bring to the class. For example, a Midwesterner might be more attractive to a private school on the coast than a student who lives in that state. Financial aid offices might work to attract a male to a school that's 60 percent women. A school that tends to be popular with one race might try to attract a student who will bring diversity.

Almost all schools try to lift their rankings by attracting students with SAT scores higher than the average at that school. So a B student might be attractive to a private college that isn't well-known. Such a college could be identified in a college guidebook like the Fiske Guide to Colleges and the second- or third-tier rankings in the U.S. News & World Report Best Colleges issue.

The student should apply to about 10 colleges. Each college will treat aid differently. When the offers arrive, if the student has been accepted to one college that's provided a lot of aid but gets little offered from a top-choice school, there will be options to get more aid. The student, or the student's parents, can call the financial aid director at the preferred school and tell the director about the better financial aid offer from the other school. It's acceptable to ask the financial aid officer to sweeten the deal so the family can afford the college.

If the attractive offer is from a comparable school, it will work best, so keep that in mind when applying for colleges. Also, make sure to meet each school's deadline for filing FAFSAs and PROFILE forms.

Parents should talk upfront with students about money so that if a favorite school won't sweeten the deal enough, the student realizes the impact of having to borrow more. This student loan calculator will help students envision monthly payments.

Students should not take on total student loans that will be more than their likely first-year salary. The average student with loans leaves college with about $26,600 in debt. That would be fine for a petroleum engineer making over $100,000, but iffy for a psychology or art student. Here's a look at starting salaries.

Pick loans carefully with the help of the college financial aid office. Federal Stafford and Perkins loans, which you get at college aid offices, tend to be best because they are covered by a helpful federal program. After a student finishes college, the government will temporarily reduce loan payments on federal loans if the person can't find a job or has a low-paying job. Here's where you can find Find information on federal loans.

Sometimes private loans can carry lower interest rates than the 6.8 percent on federal unsubsidized Stafford loans, but shop carefully. Some carry teaser rates that will shoot up if a payment comes in late.

Parents can also borrow with Federal PLUS loans at 7.8 percent, but parents shouldn't go in debt if their children can get federal loans or low-interest loans offered by state departments of education. Parents can always help their children pay off student loans, but parents should make sure they are saving adequately for retirement before overdoing it. Try this the ballpark estimate calculator.

Finally, before panicking over a college's price tag, realize that most schools will put you on a payment plan so you can pay monthly the same way you do a mortgage. And remember that while you are paying for a child's dormitory or living expenses at college, that means transferring some of your usual household budget for water, electricity, food and maybe car insurance to a different expenditure because your child is in a different location.

In other words, don't think of your old budget and tag on the full college bill as new money. In addition, you won't be saving for college anymore, so that will provide some relief. A little more relief will come at tax time when most parents can use college tax credits that might be as much as $2,500.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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