Financing Your College Education (Part 3)

With all the uncertainty about how to afford a private (or public) college education these days, it's refreshing to read a proactive article on financial aid planning. Though quite technical at some points, parents should find solace and good advice from Rob Lieber of the New York Times. One financial planner suggests an approach he calls “20-20-20.” Take the current average cost of attending four years at a public university: roughly $60,000. Save $20,000 before your child begins college by putting aside $50 a month starting at birth and assuming a 6 percent annual return. Pay $20,000 out of current income while the student is in college, and finally, have your child take out $20,000 in federal student loans over four years. The $200 monthly payments afterward are not a horrible burden for 20-somethings to bear, and they’ll be debt free once the 10-year payback period is over.

The Free Application for Federal Student Aid (FAFSA) and other forms you may encounter are intimidating, but fill them out anyway, even if you don’t think you’ll win grants from your chosen college - you never know where you might end up or how your financial circumstances may change. If grandparents wish to step in at this late stage, be aware that giving money to parents or making tuition payments directly to the college can have a big impact on aid eligibility. Consider paying off the child’s loans (or the parents’) after college graduation.

In short, there are many ways to plan - and save - for college. For most parents, the best way to save for a child’s college education is still through a 529 savings plan. With 529s, you deposit after-tax money, but any earnings are free of taxes as long as you spend them on tuition, room, board and other postsecondary educational expenses.