When the stock market started to nosedive, we all heard a lot of talk about retirement accounts taking a big hit. However, if you're a parent, you've likely had another matter on your mind as well -- college savings. Unless you've been investing more conservatively than most experts were advising, you've taken hits to your 529s and Coverdells. Add that to the fact that money is tight, and even contemplating paying for college tuition right now can be a stress-inducing situation.
A recent survey by OppenheimerFunds found that while 90 percent of parents view sending their kids to college as an essential part of the American dream, nearly half have saved less than $5,000 for the cost. More than half said that college is not as achievable today as it once was, and six in ten strongly believe that if tuition costs keep rising, college will be unaffordable for most families.
It's true -- tuition costs have been shooting up for decades. According to the College Board, average tuition, fees and room and board for in-state students at four-year public colleges in 2008-2009 were $14,333, 5.7 percent higher than the year before. Out-of-state students paid an average of $25,200 for public colleges, up 5.2 percent.
As a parent of two kids rapidly approaching college age, I know that those numbers are daunting. So how do you keep up with your savings plans when the economy and the stock market seem to be working against you? - Talk to your kids now. If you're like most parents, you feel the onus of putting your kids through college sits squarely on your shoulders. And while that's partially true, there's no reason why your kids can't help out as well. I'm not only talking about student loans, I mean sitting them down early on and discussing how they can pitch in. "Kids should know that they're going to have to make some contribution, and that if they study hard, they may have a chance to earn grants and scholarships. The more things they can do to help get themselves into college -- extracurricular activities, community service, great grades -- the better," says Donna Winn, the president and CEO of OFI Private Investments, a subsidiary of OppenheimerFunds. Once they reach high school, they can even get a weekend or part-time job and allot a portion of their pay for college.
- Aim for one-third. It's important for you to know that most parents don't pay for all of the tuition right away -- they simply can't. Parents feel better if they can make a significant contribution, however, so I suggest splitting the bill into thirds. You're doing well if you can save one-third of your child's tuition before school, then tell them to plan on borrowing one-third and -- assuming you're doing OK at the time and you're satisfying your retirement savings needs -- consider paying the remaining third while they're in college. It's a plan that makes a lot of parents breathe a little easier.
- Consider a 529. In a 529 college savings plan, your contributions are made with after-tax dollars and your money grows tax-free. This is particularly lucrative if your kids are younger because you will have the extra time to take advantage of that tax-free accumulation. OppenheimerFunds' study found that parents who have used 529 plans to save are twice as likely to have accumulated at least $20,000. Why? I'd bet that at least part of the reason is that like your 401(k), these plans let you contribute automatically, month in and month out, so you don't have to put a lot of thought into it.
Most states have one or two plans available, and some states will offer you tax incentives for investing in their plan. Still, you want to evaluate plans by past performance, investment options and expenses. One thing to note: If the money isn't used for education, withdrawals are subject to a 10 percent penalty.
- Use a Roth IRA. If you're torn between contributing toward your kid's college education and funding your own retirement, a Roth IRA is a good compromise. To be eligible, your adjusted gross income must be less than $166,000 if you're married, filing jointly, or $114,000 if you're single or married filing separately. "What a Roth IRA does is allow you to save for college or retirement at the same time. Money in this account isn't assessed for financial aid purposes, and you can always access your principle penalty and tax-free," says Tim Higgins, author of "Pay for College Without Sacrificing Your Retirement."
- Be a smart consumer. Picking a college is a buying decision and a very important one. You want to drive down the cost as much as possible. "That's done through understanding financial aid, understanding the schools that award good packages and understanding merit aid. Educating yourself is one of the best ways to catch up if you're behind," explains Higgins. Too many students miss their chance at financial aid and scholarships because the parents think they make too much money and would never qualify. But you don't know if that's the case until you apply. It's free to fill out the FAFSA form, which calculates your federal aid eligibility, so it can't hurt to send it in and see what you're offered.
- Start small. It may be that you can't afford your child's number-one pick or even his number-two pick, and that's okay. Buy yourself a little more time by starting the student off at a community college or inexpensive state school. 57 percent of parents are considering more affordable colleges because of the economy, according to the OppenheimerFunds' study. "I think realizing the dream means making sure you understand what your options are," says Winn. Transferring after a year or two isn't as daunting as it seems, provided your student does his research and makes sure he's taking credits that are widely accepted.
With reporting by Arielle McGowen Jean Chatzky is the financial editor for NBC's "Today," a contributing editor for More magazine, and a contributor to "The Oprah Winfrey Show." She is the author of six books, including the book The Difference: How Anyone Can Prosper in Even the Toughest Times (Crown, March 10, 2009). To find out more and to read her blog, visit her Web site, www.jeanchatzky.com Copyright 2009, Jean Chatzky. Distributed by United Feature Syndicate, Inc.
|
