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Saving for College: Now is the Time to Begin Saving Smart

Most families are awarded some amount of financial aid by the college their student attends. So, understanding how financial aid works is the first step to getting the best deal.

Putting a teenager through college is expensive. Even if you’re careful to get the best deal you can (see page 17), it’s likely your student’s costs will be more than you can afford to pay out-of-pocket.

For example, families with an adjusted gross income (AGI) of around $100,000 can expect to pay about $20,000 a year toward college costs. And the higher your income, the more you’ll have to come up with. Families whose AGI is around $150,000 should anticipate their costs being closer to $30,000 a year. Gulp.

If you’re feeling worried because you haven’t saved much for college— or haven’t saved at all—you’re not alone. In fact, most of us are in this boat. According to Sallie Mae, a leading provider of student loans, the average American family that is saving for college (about 61 percent of all families) has saved over $18,000. Although that’s a substantial amount of savings, for many families it will cover less than a year of college.

So, what can you do at this stage in the game? Here’s what the experts say.

Some savings are better than no savings.

Yes, it’s better to start saving early—at a child’s birth, really. But the adage “better late than never” also holds true, even if your student is already in high school.

“It’s never too late to save because every dollar you save is a dollar less you will have to borrow,” says Mark Kantrowitz, Ph.D., a nationally recognized expert on paying for college. “It’s cheaper to save than to borrow,” he adds. “Every dollar you borrow is going to cost you about $2 to pay back.” (This is an overall average for all borrowers. Some will pay more, and others will pay less, depending on the type of loan, fees, interest rate, and other factors.)

That means even minimal savings can be helpful. Take books, which for some majors can cost several thousand dollars. Why use borrowed money to pay double for those books if you can instead save that money over the next few years?

Using a 529 plan.

You may be tempted to save for college in a regular savings account, but there’s a more advantageous way to do it: a 529 plan.

You can think of a 529 like a Roth IRA or 401(k), but just for college savings, says Timothy Gorrell, executive director of the Ohio Tuition Trust Authority. OTTA manages Ohio’s 529 Plan, CollegeAdvantage.

As in a 401(k), the money you save in a 529 grows tax-free—and withdrawals are also tax-free, as long as the money is used for qualified education expenses. “This includes tuition, room and board, books, computers, and other supplies,” explains Gorrell.

What’s more, there’s no deadline for using the money in your 529 savings. Money can be transferred from one beneficiary (student) to another, and you can use money saved in a 529 plan toward a bachelor’s degree, an associate’s degree, a graduate degree, or even a vocational degree.

What if your student does get a scholarship and you don’t need the money? “You can withdraw the amount of the scholarship penalty-free,” explains Gorrell. But parents shouldn’t be overly optimistic about scholarships. “Less than one percent of scholarships that are awarded are full scholarships [tuition plus room and board],” Gorrell says.

If your student gets a full-tuition scholarship—which is more common, but still just a small percentage of students—you’ll still have to pay room and board, books, and other non-tuition expenses. These can easily add up to $15,000 a year.

If you’re interested in learning more about 529 plans, start with your own state’s plan. While you do not have to invest in that plan, doing so can save you some extra money. “In 35 states, your contribution to the state 529 plan is eligible for a deduction or credit on your income tax,” notes Kantrowitz.

“Start off saving what you can,” advises Kantrowitz. “It’s easier to increase what you save once you get started.”


Savings Don’t Significantly Impact Financial Aid

You may have heard that saving for college isn’t worth it because colleges will reduce your student’s financial aid package by whatever amount you’ve got in the bank. Not true.

Savings will have some impact on your student’s financial aid award, but it’s not significant.

And borrowing will cost you much more.

Specifically, the Free Application for Federal Student Aid—which is what the majority of colleges use to calculate a student’s financial aid award—assesses parental assets at 5.64 percent.

“That means for every $10,000 you’ve saved, the reduction in financial aid will only be $564,” explains Timothy Gorrell, executive director of the Ohio Tuition Trust Authority. In other words, you’ll get to use most of your college savings in addition to any financial aid.

But if you borrow that $10,000 for college expenses instead of saving it ahead of time, the extra loan will cost you much more in interest than that $564 reduction in financial aid.


Ideas for Saving

If you want to save, or want to save more, but aren’t sure where to find money for college, try these ideas:

  • Set up an automatic monthly contribution to your 529 from your bank account. These can often be as low as $25 a month, depending on the plan. “You’ll quickly get used to not having that money hanging around to be spent,” notes Kantrowitz.
  • If you get a raise or a  bonus, divert some or all of it to your 529 plan.
  • Ask family to make contributions instead of giving gifts for birthdays and holidays. (How much stuff does your teenager really need, right?)
  • Consider investing your tax refund in your 529. In Ohio, for example, the average refund in 2016 was about $2,700. Parents who invested that $2,700 a year for 18 years would now be able to cover as much as 40 percent of the costs of an in-state public university.

Diana Simeon

Diana Simeon is an editorial consultant for Your Teen.