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3 Ways to Make the Most of a Late Start on College Savings

Andrea Williams

In ideal circumstances, parents begin saving for their children's college educations at birth, or earlier -- certainly, at least, with enough time to have four years' worth of cash for tuition, fees and books socked away.

But sometimes life happens. Incomes shrink or disappear altogether and health emergencies take precedence. And in those cases, a child may already be in high school before parents can begin to save toward college.

Nevertheless, every dollar saved is one less dollar borrowed, and there are still ways to amass significant savings in just a few short years.

[Explore college savings plan pros and cons for financial newbies.]

1. Plan to keep saving through college: Generally speaking, most parents attempt to have their child's college expenses covered by the first day of freshman year, so that date becomes the de facto cutoff. But, says Mario Payne, a certified financial planner with Raymond James in Jacksonville, Florida, continuing to save beyond that deadline can reap tremendous benefits, especially when parents don't have a lot of time on their side.

To pay for four years of college that costs $50,000 per year including books and fees, parents trying to meet a first-day-of-college deadline need to have a lump sum of $178,594. That amount, says Payne, represents the present value of the $226,940 that college will cost in four years, accounting for 4 percent inflation.

Assuming that parents didn't begin saving until their child's freshman year of high school, over the next four years they would need to invest a lofty $4,195 per month in a 529 college savings plan with a standard 6 percent rate of return. "However," Payne says, "if you fund the same 529 plan through a child's high school years plus four years of college, using the same cost of tuition and with the same hypothetical 6 percent annual rate of return, you would only need to invest $2,347 a month to pay for college."

[Learn who can benefit from 529 plans.]

Payne says that parents can withdraw the funds at any time they need to -- not just at the beginning of a semester -- and the disbursements will be tax-free, as long as they are used to cover qualified education expenses, including tuition, books, software and anything else that is a course requirement.

2. Try unconventional savings plans: When time is short, parents need to understand that every little bit of savings helps and get more creative with their strategies. And that means looking beyond the traditional 529s.

Though Sallie Mae is most known for providing loans for college students, the organization also has a savings division. Upromise is a free-to-join program that has helped parents and students save more than $900 million for college since its inception in 2000, according to Upromise's vice president, Erin Condon. "Members can earn cash for college by shopping online at hundreds of major retailers, as well as by dining out, buying gas and using the Upromise credit card," she says.

When shopping through the Upromise online mall, members can search through more than 850 retailers (including Best Buy, Macy's and others) and earn at least 5 percent on each purchase. More than 10,000 affiliated restaurants, including nonchain, local eateries, offer 8 percent cash back. Additionally, Upromise eCoupons allow members to save when grocery shopping and the Upromise MasterCard offers additional cash-back savings.

[Discover how small amounts can add up to big college savings.]

All money is deposited into the member's Upromise account, where it can then be distributed as the member prefers. "Cash back rewards go can towards a 529 college savings plan, a Sallie Mae high-yield savings account, an eligible student loan payment or even cash in the form of a check," says Condon. She also says that high-yield users who use the program to its fullest -- leveraging the credit card, online shopping and eCoupon savings -- earn as much as $1,000 per year.

3. Create a student-funded Roth IRA: While Mom and Dad are putting cash into a 529, Sean Moore, a certified financial planner with SMART College Funding in Boca Raton, Florida, suggests students get jobs and use their incomes to fund a Roth IRA, effectively doubling the family's savings efforts.

Typically, either the child or the parent can contribute to the child's Roth IRA, but contributions are limited to the amount the child earned that year, or $5,500 -- whichever is less.

So if a child earned $10,000, he or she could contribute the full $5,500. But if the child earned only $3,000, that amount becomes the maximum contribution. Because of this, Moore recommends that all of a child's income be placed into a Roth IRA, until he or she reaches the contribution threshold.

Once the Roth is fully funded, the key to maximizing those savings is knowing how much to withdraw during each tax year. "The contribution portion of a Roth IRA is always distributed tax free," says Moore. "The earnings portion of a Roth withdrawal will be subject to income taxes, but as long as that amount, combined with other earnings, is less than the standard deduction (currently $6,300), no taxes will be due."

Also, retirement accounts receive exemption under the rules of the FAFSA, the Free Application for Federal Student Aid. This means that a Roth IRA does not count as an asset for the student and therefore does not impact financial aid eligibility. Finally, says Moore, funds from a Roth can be used to cover any purpose the student and/or parents deem necessary, including transportation costs and extracurricular activities. Unlike the funds from a 529, there are absolutely no restrictions.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.

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