High school graduation parties are fun, but for parents with young kids, these rites of passage tend to give us indigestion. After all, they remind us that our little cherubs will one day grow up and become textbook-toting college students with intimidating tuition bills. Now instead of popping an antacid and pushing these feelings to the back of your mind, it’s time to come up with a plan.
Start saving today. College financial aid expert Mark Kantrowitz just released his recommendations for how much parents should be saving. Based on $127,693, the median cost in today’s dollars of a four-year college degree for a child born in 2009, Kantrowitz, publisher of scholarship site FastWeb.org and financial aid site FinAid.org, says parents should be saving $2,640 per year from birth for a public four-year college, and $5,004 per year for a private four-year college assuming — are you sitting down? — that the parents want to pay just one-third of future college costs.
It’s a staggering sum. My recommendation? Start saving something, even if it’s a fraction of what he recommends. Then do your best to keep expenses low throughout life to make it easier to handle college bills when the time comes.
There are several ways to save for college. Many suggest a college-specific account such as a 529 plan. Like Roth IRAs, these accounts are funded with after-tax dollars and allow tax-free growth and withdrawals for qualified educational expenses. You can select any number of investment options within the accounts, from conservative money-market accounts to stock and bond mixes that become more conservative as your child gets closer to college. One pitfall of 529 plans: You may spend the money only on school; any non-qualified withdrawals will be taxed and penalized. If you’re uncomfortable with tying up money in an education-only account, other options include setting aside funds in a Roth IRA or a taxable account.
And you parents with teens should know it’s not too late. First, figure out how much you can afford to contribute and decide whether your son or daughter will be on the hook for some expenses. I firmly believe it’s better for your child to pay for at least some credits; that way they are less tempted to trade a night out for a night in class. Then sit your child down for a frank discussion about college costs. Document this conversation using what St. Louis Park certified financial planner Lee Hyatt calls a “college commitment letter.” This is where you outline how much money you’ve agreed to contribute and the expectations you have set for your child. Do you want Junior to pay for books? Will you give him a certain amount each year? Or agree to pay tuition if he pays room and board?
By letting your child know your financial limitations, he or she can start saving babysitting or birthday money and get serious about finding a job. If a job is hard to come by, buckling down and hitting the books can pay off in the form of merit-based aid and scholarships.
To find scholarships, start with popular sites such as FastWeb.com, but don’t stop there like everyone else does; you’re going to have to hunt. Jason Lum, Minnesota-based scholarship expert, also likes BrokeScholar.com. He suggests inquiring about scholarships from parents’ employers as well as civic groups and associations in the student’s academic areas of interest.
Kara McGuire is personal finance writer for the Star Tribune and St. Paul mother of three.
