7 tips for saving for college

By Sarah Damon

College tuition is on the rise, but there are ways to lower the expense without sacrificing your retirement.

With college tuition on the rise, many parents are worried about the price tag of an undergraduate degree.

But the outlook isn't as bad as it's often portrayed, and by starting to save early, you'll be able to help your kids foot the bill.

The true cost of a college degree

More and more, a college degree is becoming the minimum education requirement for many jobs. In addition, college grads make a salary 60 percent higher than those with only a high school degree, which can add up to $1 million more in lifetime income.

But with most college students paying $9,000 per year in tuition and the average private college costing $35,000 per year, which doesn't even include housing, food, supplies, textbooks, and rolls of quarters for laundry day, it can intimidate even the most frugal parents, especially if you've got more than one child.

The good news is that published tuition and actual price paid are two different numbers. According to CollegeBoard, grants and other forms of financial aid lower actual costs considerably, as shown by the following figures:

  • The average actual cost of tuition at public, four-year colleges is $7,020 per year for in-state residents. Out-of-state students pay an average charge of $11,528.
  • Private four-year colleges charge an average tuition of $26,273 per year.
  • Average tuition at a public two-year college is $2,544 per year.

Most students receive some form of financial aid. CollegeBoard reports that more than $126 billion in financial aid was awarded to undergrads in the 2008-09 school year. Full-time undergrads received an average of $10,000, including about $5,000 in grants (which don't have to be repaid).

7 tips for saving for college

While the sticker price on tuition might be lower than advertised, the average student still pays tens of thousands in tuition. But don't let your fears keep you up at night--start saving today. Consider the following tips from CNN Money's lesson on saving for college:

  1. Don't touch your retirement. Consider this: There are numerous loans, grants, scholarships and programs to help kids pay for college. Don't sacrifice your own retirement to save for college. There are few financial-aid programs to help retirees.
  2. Save more by starting today. Through the magic of compound returns, saving a modest $100 a month for 18 years will put your college savings at $48,000 (assuming an 8 percent average annual return).
  3. Take on risk appropriate to your child's age. When your child is under 8 years of age, you want a portfolio tilted toward stocks. Between ages 9 and 13, it's time to get more conservative by directing more money to tamer stocks and bond funds. At age 14, it's wise to start sheltering returns so that you are out of equities by the time you need to cash out to pay for college.
  4. Don't count out grants and loans because of a high salary. Family income is just one factor in computing financial-aid packages, which also take into account medical expenses, the number of family members in college and other factors. Even if you think your income is too high, it's important that your child fills out the Free Application for Federal Student Aid (FAFSA) to determine his or her eligibility for grants, work-study and federal loans.
  5. Research 529 savings plans. You can start a 529 plan no matter the age of your child and no matter your income level. You can save more than $200,000 per beneficiary and make tax-free qualified withdrawals to pay college expenses. There are two types of 529 plans to consider: college savings plans, which are usually mutual funds, and prepaid college tuition plans, which allow you to pay for your child's education now, at today's costs (only available for public colleges).
  6. Don't forget federal credits and tax breaks. There are two federal tax credits you may qualify for in the years you pay tuition--the American Opportunity Tax Credit and the Lifetime Learning Credit. If you have a student loan, you also can deduct up to $2,500 per year in interest paid if your modified adjusted gross income was under $70,000 if you're single or $145,000 if married filing jointly.
  7. Cut costs with automated payments. Once your child graduates, lenders often offer incentives that can cut costs further, such as reducing your interest rate by 0.25 percent for setting up automatic bill pay.

Finally, as CNN Money notes, there are good reasons to not pay for your child's education, or at least not all of it, and not through savings plans. For example, with limited investment options in most education funds, it's important to consider whether you can get better rates of return with alternate investments. Also, requiring your child to chip in for their college expenses is a good way to help them appreciate the value of their education.

Ultimately, it's up to you to decide the best course of action for your family, but the earlier you research your options, the more prepared you and your child will be when it's time to pack their bags for college.