If you're just starting to save for your high school student's college, don't despair. You'll be surprised what you can accomplish if you shift into heavy-duty saving mode, search for extra sources of income and slash your spending.
Here's some tips for parents looking at funding college in five years or less. It's a myth that saving will ruin your financial-aid chances. The more you save, the more options you'll have and the less you'll have to tap current income or higher-interest loans.Without knowing where your kids will go, what it will cost and how much help you'll get with the bills, it's tough to set a savings goal. Shoot for at least enough to cover in-state public-college costs and add more whenever you can.
Go to the College Board's Web site and calculate your expected family contribution -- the amount of money financial-aid officers estimate your family can afford for a year of college. The figure will change if your income changes by freshman year, but it will give you a general idea of how much you'd need to pay before financial aid kicks in.
The financial-aid formula considers income to be more important than assets and may not even look at some of your savings, depending on your age and marital status.
By this time you can also predict whether you'll qualify for a Hope Scholarship (worth up to $1,500 a year per student for the first two years of college) and a Lifetime Learning credit (worth up to $2,000 annually per family after the year 2002 for each additional year of postsecondary education). Your adjusted gross income must be below $100,000 for joint filers and below $50,000 for single filers.
Finally, move money around to improve your financial-aid picture. For example, if you sell stocks after January of your child's junior year in high school, the earnings will be considered income on your financial-aid form. But if you sell your big winners before then, the proceeds will be considered assets and count for much less in the aid formula.
If your children are a decade or more away from their first college dormitory, you can profit from the tips offered frantic parents of older students: Save what you can and look for ways to cut college costs.
But the good news for you is that you don't have to rush.
With private schools expected to top $160,000 for a four-year degree 10 years from now and public schools reaching $74,000, "there's no big secret other than to start early and, if that doesn't work, downgrade your expectations," says Mari Adam, a financial planner in Fort Lauderdale, Fla.
Without knowing where your kids will go, what it will cost and how much help you'll get with the bills, it's tough to set a savings goal. But you can take the realistic approach and accumulate enough to cover in-state public-college costs, adding more to your college-fund coffers whenever you can.
You'll probably find more money available to save as your income rises and day-care expenses decrease.
Whatever the size of your stash, keep it mostly in stocks for now (60 percent domestic, 20 percent foreign), but shift about 20 percent into bonds or moderately aggressive bond funds.
Saving in a Roth IRA can help you trim your tax bill. If you and your spouse fund a Roth to the max, your $4,000 a year will grow to nearly $63,000 (if you earn 8 percent) by the time your child starts college in 10 years. You can take out your entire $40,000 in contributions tax- and penalty-free. If you tap earnings, too, you'll pay taxes, but no penalty applies.
And let your state help. A state savings plan can be a good way to impose discipline and get a tax break to boot.
If your state doesn't have a savings plan but has a prepaid-tuition plan, consider using it as part of the bond allocation. You may get better returns from a five-year CD, but the prepaid plan can provide peace of mind.
Just be sure you know what happens if your child chooses an out-of-state school. Some states let you use the full value anywhere. Others, such as Florida, limit your return.