Got $160,000? (For college)

Sticker shock
That’s what parents have when they see college tuition costs, no matter if their child is seventeen days or seventeen years old. Small wonder. By 2019, private college tuition could run $160,000 or more based on today’s inflation rates.

“Parents say, ‘What’s the point? I can’t save that kind of money,’” says Russ Kruse, Jr., senior vice president and manager of student banking for Minneapolis-based U.S. Bank.

Panic is common. But don’t close your eyes and wish that number away. Instead, take a closer look. Tuition doesn’t have to be as big or as daunting a goal as you might think, especially with a long savings horizon. Even those with less time have more options than they realize. On the following pages, Twin Cities financial advisers offer college tuition planning strategies for whatever stage you’re at.

Plan 1: You’re Parents of a Newborn Baby
Bleary-eyed parents might be overwhelmed by the array of savings options, but they have one really big thing going for them if they choose wisely: time. “The earlier you plan, the less pain out of your pocket on a monthly basis because of the power of compounding,” says Gary Tangwall, senior financial consultant at the Landmark Group division of Minneapolis-based Thrivent Financial for Lutherans.

Before committing dollars anywhere, however, assess where your college savings goals fit into your overall financial plan. Fully fund your own retirement first, advisers urge, because you won’t have the same loan, grant, or scholarship resources that little Jane or Joey will. Use an online financial calculator and websites such as savingforcollege.com to help break down your savings goal into monthly amounts. Then, take a look at your options, concentrating on mutual-fund–driven accounts for the best overall return on your investment.

• 529 College Savings Plans
“The 529 plan is really one of best things that’s come out in a long time,” says Lauren Ganz, investment representative with St. Paul–based Bremer Financial. These state-offered plans let you invest money in tax-sheltered mutual fund accounts—just pick a plan with an asset allocation that fits your needs and investment temperament.

“Be more concerned with fund family and performance rather than what state plan it is,” says Chris Zuck, a financial consultant for Associated Wealth Management, a division of Associated Banc-Corp of Green Bay, Wisconsin.

Parents like the 529 for its tax savings and flexibility: Withdrawals for higher- education expenses are tax-free, at least until 2010 when Congress decides whether or not to extend that provision. 529s also have high contribution limits. And grandparents can contribute—in fact, if they open the account, it can’t be considered an asset on the child’s application for financial aid. And the beneficiary can be changed if, for example, a child doesn’t plan on going to college or has qualified for scholarships and doesn’t need the money. 

• Coverdell Education Savings Account
If you meet the income limits ($95,000-$111,000 modified adjusted growth income single, $190,000-$220,000 joint), put away up to $2,000 annually in this tax-deferred account to cover elementary and secondary school expenses as well as higher education. This tool offers a greater choice of funds to invest in than a 529, Tangwall says. The account is transferrable to another beneficiary if your child won’t attend college, though the funds must be used by the time the beneficiary is thirty to avoid penalties.

• Roth IRA
Many parents are surprised to learn that a Roth IRA can be an education funding or savings tool. But if you meet the income cap requirements ($95,000 AGI single, $150,000 joint), after an initial five-year period, qualified contributions can be pulled out tax and penalty-free to spend however you like.

• Variable Universal Life Insurance
Besides guaranteeing your child money he or she would not otherwise have if you were to die prematurely, the “cash value” portion of this type of life insurance policy enjoys tax-deferred growth over time and allows you to borrow against it. “You’re keeping control so if a child does not go to college, you don’t have penalties,” Tangwall says. “Meanwhile you can take tax-free proceeds out to go toward your child’s education.”

Plan 2: Your Child Is in Middle School and You Haven’t Started a College Fund
If you got a late start saving for college, it’s still not too late to consider retirement-oriented or education-oriented mutual fund accounts. “A 529 works great for catch-up,” Tangwall says. Say you have a sudden windfall from a home sale or a bonus—you can put up to $55,000 all at once into a 529 tax-free, as long as you don’t contribute again for another five years.

Take a look at all your options—from spending less to looking at ways to earn more. “Consider, ‘What are the realities of our cash flow?’” Zuck says. “‘How much can we put away? If we have to do some borrowing, what’s the cheapest way of borrowing?’”

Now is also the time to talk to your child about the cost of education and the realities of your financial situation in order to help shape expectations. Maybe you guide her away from the expensive Ivy League school she’s been eyeing and encourage her to take another look at a great state school.

Plan 3: You’ve Saved for Your High School Freshman’s College Tuition, But Is It Enough?
You’ve done a good job saving for college, but you still see a gap; plus, you’re worried that your child won’t qualify for financial aid. What should you do?

First, identify how much you’ll need and where to take it from. Consider tapping home equity, an IRA, or taking a loan from your 401K. It’s also still too early to rule out the possibility of financial aid. “The financial aid office would have you think it’s cut and dried, but it’s not,” Ganz says. “Your income is only one consideration, so you might be eligible.” Check websites such as finaid.org and collegeboard.com to tweak your child’s profile to be “as eligible as possible” for aid, Ganz suggests.

Get your child actively involved. He could be socking money away from a part-time job or he could take advantage of advanced-placement courses that allow students to earn college credits at the high school level. “Start looking at the costs of different schools,” Zuck says. “Maybe he starts at a community college.”

Plan 4: Your Teen Is Graduating from High School with No Money for College

It’s crunch time. Your child is seventeen, with no savings in hand for college. Eligibility for financial aid is virtually guaranteed, but ouch, those college loans! Is there any saving grace?

Yes, advisers say. First, look for free money in the form of grants and scholarships. “In applying for scholarships, start early, apply often, and don’t stop applying even when you go to college,” Ganz says. “It’s absolutely astounding how much money is available for just about anybody, and at least 20 percent of scholarships a year go unclaimed.”

Visit fastweb.com, studentaid.org, and collegeanswer.com, plus websites of colleges your child is applying to and those of associations related to careers he might be interested in. But beware of scholarship scams, especially if the application requires a fee. For a list of known scams, check ed.gov and ftc.gov.

Also, consider taking out a Parent Loan for Undergraduate Students (PLUS) in your name and having your child repay you. “It's guaranteed by the federal government and there's a cap on the interest rate, which is great,” says Lynette Wahl, a director of financial aid at Hamline University in St. Paul. If you can’t secure a PLUS because of credit issues, your child may be eligible for an additional unsubsidized Stafford loan.

If either you or your child meet the income limits (if your child is no longer considered your dependent), you can deduct tuition costs with the HOPE Scholarship Tax Credit or the Lifetime Learning Tax Credit. And you can still claim the credit even if you make a withdrawal from a 529 plan or Coverdell ESA, as long as you don’t use the credits to pay the same expenses covered by those accounts.

Other options? Your child could attend school part time while working, or take on more debt to attend full-time. But make sure she understands how to use credit cards responsibly, so that she can succeed without excessive debt.

No matter what life stage you find yourself in, consider as many options as you can. Juggling college expenses with the rest of you life can be challenging, but it is manageable—especially if you ask for help when you need it. “It’s never too early to start saving,” Ganz says. “But also it’s never too late if you have a good adviser who keeps on top of all of this.”