The insane cost of higher education has been much-discussed in the current presidential campaigns, for good reason: Over the past 10 years, average annual tuition has increased by 40 percent at public four-year universities, according to the College Board. If your child is eyeing a private college, you could face a bill for some $200,000 over four years.
70%Percentage of student loan defaults that come from borrowers who attended for-profit colleges and community colleges, according to the Brookings Institution.
If you want to help your children pay for college, start saving early--like, as soon as you change your first diaper. Put as much as you can annually into a 529 account, which is an investment vehicle provided by most states and some colleges. These accounts allow you to save money tax-free specifically for education: Your contributions can't be deducted from your federal taxes, but you won't be taxed when withdrawing any dividends or other earnings your investments make to spend on education. You can also deduct contributions from many states' income tax.
The one disadvantage: Any money taken from a 529 fund can't also be used to claim tuition tax credits on the same expenses, so be sure to know what credits are available to you. For example, the federal American Opportunity Tax Credit offers up to $2,500 for each college-going dependent, although to qualify your income has to be less than $90,000 singly or $180,000 jointly.
Almost all financial advisers suggest opening a 529, but they differ on how much they recommend putting away. For example, don't stop contributing to your retirement when you open a 529, says Bob Morrison, a financial planner with Downing Street Wealth Management. And pay attention to any changes in your kid's college plans. "I don't like to lock a client into a 529 plan if the student does not go to college or does not need all the funds," Morrison says. He suggests putting one-third of your savings into a 529, and splitting the other two-thirds between vehicles like a Roth IRA and a brokerage account. You can withdraw contributions from the latter two without penalty, whether it's needed for college or something else.
If you're getting a late start on planning for college costs, be transparent with your child. "You need to say, 'This is what we saved, and here's how we can help you,' " says Robert Farrington, founder of the College Investor website, which gives advice on how to pay for higher education. "It's about managing expectations early."
Expensive private schools usually offer more merit-based scholarships and financial aid than public schools, but such help is still difficult to come by. Try to negotiate with college financial aid offices. If your child wants to go to a certain college but you've got a better aid package elsewhere, let the preferred college know. "They can't make miracles happen, but if it's a couple thousand dollars short, they can help," Farrington says. Seek out external grants, too, but know that most such aid is relatively meager. "One in eight students use private scholarships to help pay for college, and the average amount of those is $4,000," says Mark Kantrowitz, publisher of college scholarship site Cappex.
Which brings us back to student loans. Start with federal loans, which are generally cheaper and more readily available, and which offer better repayment terms than private loans. The most common choices are Stafford loans, with an undergraduate interest rate of 4.29 percent for an annual amount beginning at $5,500; they can be subsidized (meaning the government covers the interest during a postgraduation grace period) or unsubsidized (the interest accrues while the student is in school). You can also take out federal Direct Plus loans, which require a credit check, for the full cost of attending the college, minus other aid. The current interest rate is 6.84 percent.
But Kantrowitz warns that total debt upon graduation shouldn't be more than your child's starting salary, since student loans are almost impossible to discharge, even through bankruptcy. "It's like a trip through hell without a light at the end of the tunnel," he says. Do what you can today to spare your child that journey.