College tab is easier to pick up with savings

PERSONAL FINANCE

September 02, 2001|By EILEEN AMBROSE

FOR MANY families, financial paralysis sets in when they hear the latest figures on the cost of a college education.

Overwhelmed by costs escalating faster than the rate of inflation, parents can end up saving nothing.

"We financial professionals have created this problem to some extent," says Judy Miller, a financial planner with College Solutions in Alameda, Calif.

A financial adviser, Miller asks parents where a child wants to go to school, calculates the future cost of that tuition and comes up with a formidable amount, say $500, that parents must save each month.

"The net effect is to cause people to say, `I can't possibly do that. I can hardly make my mortgage payment and go on a vacation. I'm not even going to try,'" she says.

Ideally, parents begin saving for college when their child is very young and have enough when it's time to pay tuition. And some parents do that.

But there are plenty who don't. Maryland financial aid offices say they often find that parents of all income levels have saved little or nothing for college.

"For the majority of people, it sort of kicks in the senior year of high school," says Sharon Austin Hassan, director of financial aid at Goucher College in Towson. "They realize, `This is going to cost, and we're not ready.'"

Low-income families will qualify for need-based financial aid, and wealthy families will be able to foot the bill out-of-pocket, Hassan says. But for the families in between, she says, "it means that they will borrow more than they might have had to if they saved a little earlier."

And that means students may be saddled with debt after graduation or parents may be repaying loans as retirement nears.

But financial experts say if parents set aside something - even if it's just a little that can grow over many years - they will be in much better shape and less at the mercy of financial aid offices.

"Just do something. Just start somewhere. Even if people don't have money, even if they start saving $1 a week, you will have something by the time you get to college," Hassan says.

Experts suggest some simple steps for those with young children:

Begin by researching schools, aid and scholarships to become familiar with the terminology and to get a realistic idea of costs.

"The perception the average parent has is that every college is charging $30,000 or $40,000," says Jack Joyce, director of Guidance Services for The College Board in New York.

But last year, about 47 percent of full-time undergraduate students at four-year institutions attended schools that charged less than $4,000 in tuition, Joyce says. Another 23 percent attended schools with tuition of $4,000 to $7,999.

Parents won't be expected to save the full cost of their child's education, says Mark Kantrowitz, publisher of FinAid, an online source for financial aid information. "It would be unrealistic to do so. Most families will get some form of financial aid, but they do need to save," he says.

As a general rule, one-third of the money for college will come from savings, one-third from current income and one-third from loans and financial aid, Kantrowitz says.

Miller suggests that families try to save the "expected family contribution" - the government's assessment of a family's ability to pay for college. It will vary among households, depending on size, income, assets and how many family members will be in college at the same time.

You can figure your expected contribution with online calculators at www.collegeboard.com and www.finaid.com. Be aware, it's only an estimate and could be higher.

If you can't handle the expected contribution, review your budget and see where cuts, even small ones, can be made, Miller says. "Don't worry if it's enough or not," she says. You can always increase the amount later.

Don't save in your children's name. It can reduce financial aid because children's assets and income are considered more readily available for school than a parent's, experts say. Plus, once children come of age, they control how the money is spent.

There are plenty of savings vehicles. Miller likes college savings plans, sometimes called 529 plans.

These state-sponsored plans allow parents and others to invest in a tax-deferred account for college. Tap the account for noncollege expenses and you'll pay a 10 percent penalty on the earnings.

These plans have become even more attractive under the new tax law. Beginning next year, the earnings will no longer be federally taxed when withdrawn for college.(As are other tax breaks under the new law, this one is set to expire in 2011. Many don't expect Congress to let that happen.)

Most states have a college savings plan and more are getting one. Often, you can participate in other states' plans. And the new tax law has made it easier to shift to other plans once a year.

Maryland expects to launch a savings plan next month. Residents will get state tax deductions on contributions, and withdrawals for college will be free of state tax.

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