Set your goals. For starters, estimate how much your child's college education will cost and decide how much you want to contribute and how much your child will be responsible for.

For example, some parents commit to paying for tuition, fees, and room and board, giving the child the responsibility for the rest of the tab. Once you’ve made that decision, figure out how much both you and your child will need to save.

If you haven’t already, now’s also the time to evaluate your safety net.  Review your disability and life insurance coverage to ensure you’ll be able to adequately provide for your child’s college education if you become ill or die prematurely.

Don’t neglect your retirement savings. If money's tight you might be tempted to abandon saving for retirement in favor of building your child’s college fund. There are good reasons not to, however. 

Most importantly, you or your child can take out loans for college if necessary, but you can't borrow to fund your retirement. Plus, retirement accounts accumulate tax deferred or tax free and your employer-sponsored retirement plan may kick in money in matching contributions.

Furthermore, some retirement accounts aren’t counted among your assets under the current formula that determines your eligibility for needs-based federal financial aid. (Though some colleges do take retirement assets into account when doling out their own aid.)

Save automatically and regularly. If you can’t save as much as you need, save as much as you can since even small amounts add up over time. The best way to do this: Sign up for credit union direct deposit and payroll deduction services and automatic mutual fund investment and reinvestment plans.

School yourself in the college funding options. Between education savings accounts, 529 college savings plans, 529 prepaid tuition plans, U.S. Savings Bonds, and custodial accounts, there are lots of ways to save for college. And with the college expenses tax deduction, student loan interest deduction, and education credits, there are also lots of tax breaks to take advantage of while you’re paying the bills.

Get the facts on financial aid. According to the College Board, a not-for-profit membership association of colleges and universities, about 75% of all full-time college undergraduates receive some type of financial aid.

The federal government is the largest single source of aid, providing 67% of all direct aid dollars. Some aid is based on financial need, while some is available to all families who meet the general eligibility requirements.

While it's true that the more assets you have, the less needs-based federal financial aid you'll qualify for, the current aid formula bases a family's eligibility mostly on income  --  a much smaller weight is given to assets.  Therefore, building a college fund won't necessarily hurt your chances of qualifying for needs-based aid. 

What's more, even if you calculate that your family would be eligible for aid today, the rules, as well as your personal financial situation, may change yearly.  And whatever needs-based aid you'll qualify for will likely be in the form of loans, since loans now represent 56% of all student financial aid. So the more you save, the less likely you and your child will have to borrow later.
 

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

Previous Step

Privacy Practices Security Practices Business Continuity Plan Supported Browsers Report a Site Problem Linking To Third Parties
©1997-2012 CUNA Mutual Group.