Make Saving for College Easier on Your Family

For many, college is a big part of the American dream—but paying for it can be a nightmare. Headline-grabbing reports of debt-burdened grads make it more important than ever to have a plan for saving for college in place ASAP. Follow the expert advice below and you can help your child can get a BA without a huge IOU.

START PLANNING EARLY

“The biggest problem parents have with saving for college is that they start too late,” says Michael Velasco, founder of Red Oak College Planning in Basking Ridge. “Ideally, parents should begin saving as early as possible after their child is born, at least by the time he’s in middle school. And they should consult a professional college planner for help. We know the ins and outs of the college financial aid process and can leverage that so families pay the least amount.” For instance, if you have a 529 with a bank like Fidelity, you can get cash back on a credit card that goes directly into that savings account.

STAY FOCUSED ON ACADEMICS

Since scholarships and grants are largely based on GPA and ACT/SAT scores, teach your kids at an early age to work hard in order to make saving for college easier. Discuss how a high GPA can translate into scholarships and grants when applying for college. During your kid’s freshman or sophomore year, sign up for a quality ACT/SAT prep course (like Princeton Review) and encourage your child to take frequent practice tests, says Anthony ONeal, author of Debt-Free Degree. Your teen should also research minimum test scores required by prospective colleges and take ACT/ SAT tests more than once to improve his or her scores.

You may want to encourage your teen to take as many advanced placement courses as possible during high school. If credits for the courses are transferrable, you’ll save money on tuition. Plus, good scores on AP tests show that your kid has what it takes to perform well in college.

DON’T GET DISCOURAGED BY A COLLEGE’S STICKER PRICE

Most students can get scholarships and grants based on merit and/or financial need, says Velasco. For example, according to Princeton’s website, about 60 percent of its students get grants. The average annual grant for the Class of 2022 was $53,100 a year, making the average net cost of tuition, room, board and fees $13,600 for aid students. For families earning up to $65,000 a year in the Class of 2023, 100 percent of tuition, room, board and fees were covered. The catch? Princeton’s 5 percent acceptance rate. “Have your kid spend an hour a day searching sites like Scholarships, MyScholly and Fastweb for scholarships and grants,” says ONeal. “Be intentional, as if it’s a job.”

CHOOSE THE RIGHT SAVINGS PLAN

While many 529 plans are tax-deferred and tax-exempt, there are pros and cons to consider, says Velasco. Since a 529 is considered a parental asset, it’s only assessed at 5.64 percent of its value on FAFSA, whereas Uniform Gifts to Minors, considered the child’s asset, are assessed at 20 percent. This means if you want your kid to get the most in grants, scholarships and loans, a 529 is better than gifting them cash. 529s and Coverdells invest in market-based assets, so there’s no guarantee of how much money will be available when needed. If a family has individual 529 accounts for multiple kids, FAFSA considers the total of all accounts when assessing one child’s need.

529 PLAN

• Can be used by residents in all 50 states for any college or university.
• Taxes are deferred on gains and income; withdrawals are tax-free if used for qualifying expenses.
• Children can be “gifted” up to $70,000 from an individual parent or $140,000 from both parents without owing federal gift tax. This amount can be given all at once, as long as parents make no other gifts to the same child over the five years they’re allotted for saving for college.
• Money withdrawn for non-college purposes is taxed, along with a 10 percent penalty on any earnings.
• You can roll funds over to a different child, or even yourself, if your first kid doesn’t go to college. 529s can be set up as “target date” or “age-based” funds that move into less risky investments as a child gets older.
• Parents can determine how the money is invested based on a very limited selection made available to them.

NJ BEST (NJ’S 529 PLAN)

• May be used for any accredited college or university.
• You can get up to $1,500 as a one-time credit towards tuition depending on the length and amount of investment. NJ Best has no earning restrictions for parents.
• The first $25,000 in savings is excluded from the criteria used to determine eligibility for financial aid awarded by New Jersey.
• You can open a NJ Best plan with as little as $25 and contribute a maximum of $305,000 per child over his or her lifetime.
• New Jersey also offers an advisor-sold 529 through Franklin Templeton.

COVERDELL EDUCATION SAVINGS ACCOUNT

• Coverdell is an investment account designed to encourage saving for college expenses (elementary through college). These expenses include tuition, books and uniforms.
• Allows money to grow tax-deferred and to be withdrawn tax-free for qualified education expenses.
• Earnings, gains and income are tax-deferred, but not the contribution itself. Contributions are limited to $2,000 per year per child. Savings can be rolled over to another kid if your first one doesn’t attend college.
• Unlike 529s, parents have more control over where contributions are invested. At age 30, money saved goes to the child, regardless of college attendance.

CIRCLE FUNDING

A new way to inspire college savings is circle funding. Through sites like UGift and CollegeBacker, friends and family contribute to your child’s 529 fund online, making it an easy gift option. CollegeBacker does all the work (free of charge), so it’s hassle-free, while sites like UGift require you to have investment accounts.

OTHER WAYS TO PAY FOR COLLEGE

Apply for a Federal PLUS loan, NJCLASS loan or cosign on private educational loans. These loans can’t be forgiven, even with bankruptcy.

Take out home equity loans or a second mortgage but only if you know you’ll be able to make the payments on schedule.

Borrow from a 401(k), but if you leave your job or are fired, you must immediately repay the loan, or it’s treated as a taxable distribution.

Bottom line: Don’t jeopardize your retirement. Save and do your homework on scholarships, grants and aid.

HELPFUL WEBSITES

• To determine eligibility for aid at most colleges, fill out a Federal Aid for Students Application (FAFSA).
• College Abacus compares the net price estimates of more than 5,000 colleges before students apply and any financial aid determinations are made.
• The Find Your Best Value College tool by Money magazine allows you to screen colleges that meet your child’s needs and preferences—such as schools likely to award need-based aid or schools that don’t load students with debt.
• Saving for College provides information about 529 plans.

Tips for Getting Started

In his book Debt-Free Degree, Anthony ONeal offers ways to ease the financial burden:

GET A JOB

Contributing to their college savings by working part-time in high school and college gives kids “skin in the game.”

EMERGENCY FUND

Have them amass a $1,000 emergency fund while in high school and add to it regularly. Doing so greatly reduces the temptation to get a credit card and spend recklessly.

BE REALISTIC

Their dream school is where they can get a degree debt free. Consider less expensive options:

• In-state college
• Community college (the NJ STARS scholarship can get you up to five semesters of free tuition; make sure your college of choice accepts your credits).
• Freshman Year For Free. If your kid’s unsure about college, this online program offers freshman courses at no charge and pays for CLEP tests to convert courses into college credits.
• If college isn’t for them, consider trade or technical schools.

FINISH IN FOUR

Completing college in four years saves big money!

GAP YEAR

Take a year off between graduation and college to earn money and decide on a career path.

—New Orleans native Karen B. Gibbs is a freelance writer specializing in lifestyle.