As a nation, are we saving enough for our children's college tuition?
Probably not. Earlier this year, Sallie Mae's nationwide survey of 2,000 parents with kids under 18, "How America Saves for College 2014," showed that more people appear to be saving money for college -- but not much more. In 2013, 50 percent of families surveyed said they were saving for college; in 2014, that number rose to 51 percent. Meanwhile, the financial services firm Edward Jones just released a survey of 1,006 adults, taken during the first four days of May, which showed 70 percent of Americans don't know what a 529 plan is.
And, of course, college isn't cheap. Currently, the average cost of a year of college is $8,893, according to the College Board, a New York City-based nonprofit aimed at expanding access to higher education. If you go out of state, that amount will almost triple ($22,203), and the average cost of attending a private university is $30,094. If you're wondering how much debt you can afford to rack up, "a good rule of thumb is to have no more than your first year's wages in debt," says Leonard Wright, a certified public accountant and personal financial specialist in San Diego.
But he stresses: "Zero debt is best."
With that in mind, if you have kids, and you're not certain how you're going to pay for college, here are some suggestions to get you started.
[See: U.S. News' College Savings 101 .]
529 plans. For those who don't know, a 529 plan is a vehicle you put money in that's designated for college. There are a lot of 529 plans, which all come with their own annual fees and operating costs. Generally, 529s have tax advantages, such as earnings that aren't subject to federal tax. Almost every state has its own 529 plan, but you can put your money in any state's 529, and you may find that there are some state plans you like better than your own. So you'll want to do some research before signing up. SavingforCollege.com is a good place to start.
You might also consider a 529 college prepaid plan. The advantage is that you can buy tuition credits at a college in your state at current tuition rates instead of waiting, say, 18 years and paying what college will cost then. The downside is that your child may not want to go to the school you've chosen. You can get your money back, but the money you invested may not have grown much.
UTMA and UGMA accounts. These custodial accounts act as a trust for your child. In other words, if you have assets like stocks, bonds, annuities or plain old cash that you'd like to reserve especially for your kids, you can put them in one of these custodial accounts. (UTMA stands for the Uniform Transfer to Minors Act; UGMA, the Uniform Gift to Minors Act.) The downside is that when it comes to financial aid, your college will consider this when deciding how much to give your child. So if you have a lot of money in one of these accounts, the school may not give you much. On the other hand, if you have a lot of money in one of these accounts, you may not need financial aid all that much. Still, before opening a UTMA or UGMA, it's best to discuss it with a financial advisor.
Coverdell Education Savings Account. This is another type of trust or custodial account that's specifically for a child's college education. The main downside is that you can't put more than $2,000 a year into one or multiple ESAs. So if you open a Coverdell ESA for your child and your father does, too, you could put $1,000 in and he could contribute the same, but then you're done. Of course, if you're fighting to sock away $200 a year, this may not bother you. Still, limitations like this are why 529s have become so popular. But 529s do have maximum lifetime contributions ranging from approximately $200,000 to $400,000, depending on the state.
Get your child to pitch in. If you have a four-year-old, you're out of luck, but if your 14-year-old is baby-sitting, and certainly if your 17-year-old is flipping burgers, he or she could start putting some money away for college. That's a suggestion from George Walter, vice president for enrollment services at La Salle University in Philadelphia. Walter acknowledges that it isn't always feasible, but he suggests students break up their paychecks into three portions.
[Read: 10 Ways to Teach Your Kids to Be Savers .]
"Weekly expenses, short-term goals and long-term expenses, including college," he says. "This approach will help in both budgeting and establishing a good practice that will help the student prioritize and prepare them to manage income and expenses throughout their lives. Even in the summer between graduation and first semester in college, this practice can result in a student saving enough to pay for their books and supplies for the first year."
If you can't raise enough money, lower the costs. In other words, if your spending capacity is limited, try to reduce the amount of money your child will need for college.
This is obviously where scholarships can come in, but there are other strategies you can enlist, too. Shakeela Hunter, director of the Student Money Management Center at the University of Texas at Arlington, rattles off a couple of suggestions: "See if your student's high school offers dual credit and/or [advanced placement] courses, which count as college credit hours. Choose a community college that offers tuition at a lower cost that your child can attend, and then transfer those credits to the university of their choice."
It will also help if your child knows what he or she wants to study. "On average, it's been taking students almost six years to graduate," says Jack Schacht, president of My College Planning Team, a company based in Wheaton, Illinois, that helps parents navigate the challenges of helping kids apply to and fund college.
[See: How to Save $500 This Month .]
So if you can help your child figure out what he wants to do with his life early on, that may help bring down college costs if he finds the right major and career path. The four-year plan is a lot cheaper than five, six or more.
Of course, that's a lot easier said than done. "You need to know yourself," Schacht says. "And how well does a student know himself at age 16?"
- Financial Aid