As tuition costs continue to rise, many families with young children are worried about how they'll pay for college. Although the pace of price increases slowed for the 2013–2014 school year, according to the College Board's 2013 Trends in College Pricing report, the numbers remain daunting:
In-state tuition and fees at public colleges increased 2.9 percent, for an average cost of $8,893 for the 2013–2014 school year; out-of-state tuition and fees rose by 3.1 percent, to $13,310.
Tuition and fees at private colleges saw an increase of 3.8 percent, averaging $30,094 for the 2013–2014 school year.
And, of course, those figures don't even include room and board.
Where to begin?
First off, it's important to keep things in perspective. Here are a few facts to consider:
Your savings will have a minimal impact on financial aid. Using the Free Application for Federal Student Aid (FAFSA) formula, only 5.6 percent of parental assets counted for financial aid purposes can be factored into your expected contribution. Your income during the child's college years will have a more substantial impact, with 22 percent to 47 percent factored into the FAFSA equation.
Your child will likely get some help. Thanks to financial aid, loans, and grants and scholarships, few families end up paying the full price of tuition. Even more affluent families can qualify for assistance. The amount of aid you receive will largely depend on your personal situation at the time your child enters college.
Your child may attend a less expensive school. Remember that the tuition figures you read about are averages; many students will attend schools with lower costs.
The key to saving for college: start early!
The sooner you begin planning for college, the better off you're likely to be. These tips can help you jump-start your savings plan:
Use the "one-third rule." The prospect of paying for college may seem more manageable if you think about dividing the cost into three pots. Plan to save one-third of anticipated college costs, pay one-third from current income and financial aid, and use loans (either parent or student) to cover the final third. As your financial situation changes, you can adjust the percentage you allocate to each pot. For example, as your savings grows, your next stop might be one-half, one-quarter, one-quarter.
Set a benchmark. Another option is to set a specific monthly or annual savings goal, breaking it down so that the amount is reasonable and attainable. For example, a goal of $2,500 per year is equivalent to saving about $50 per week.
Don't shortchange retirement
Saving for college shouldn't derail your retirement savings plan. You will likely be working while your child is in college and may be able to cover some of the cost with current earnings. Also keep in mind that, while loans and financial aid can assist with college expenses, you can't take out a loan to fund your retirement.