Saving for your kid’s college tuition

Jean Chatzky TODAY Financial Editor • Profile • E-mail

Let's face it. It’s fun to spend money. Doesn't even matter how, really — vacations, dinners out, clothes, entertainment — we'll buy it all. But those splurges often come at a cost that can be far greater than the number on the price tag.

That's especially true if they're causing you to put off crucial financial goals, like saving for college and retirement. A recent study by AllianceBernstein Investments found that half of parents surveyed spent more on vacations in the past year than they saved for their kids' college fund. Perhaps worse, the survey also revealed that 58 percent spent more dining out or ordering take out.

Why? For any number of reasons, says Jennifer DeLong, director of college savings plans at AllianceBernstein, including inertia, confusion and unrealistic expectations. The study, called College Savings Crunch, not only surveyed parents, but also financial aid professionals. Their insights are particularly helpful in letting parents see where their perceptions of how college will be paid for are more than slightly off the mark.

According to the pros, parents tend to overestimate the amount of financial aid available. Most think their kids have special talents that will deem them worthy of scholarships. They fail to adjust the cost of college over years of inflation. And the vast majority (70 percent) don't have a financial plan in place to help them meet their goals.

The result is that when the time comes to pay up, parents often dip into their retirement funds. They or their children (and many times both) take on gobs of debt. And both parties wind up behind on other financial goals — children are late to buy their first home or start a family, and parents fall behind in paying off the mortgage and retiring.

So how do you get on the ball? Well, you can start by pushing aside your expectations and facing the realities of college costs. Here's the real deal about paying for college:

• Costs increase yearly. Rises in tuition are one thing you can almost always count on. According to Mark Kantrowitz, director of advanced projects at fastWeb.com and author of "FastWeb College Gold: The Step-by-Step Guide to Paying for College," "College costs over any 17-year period tend to increase by a factor of about three."
• Some parents mistakenly look at tuition costs for the year they start saving, and fail to re-evaluate based on inflation. This mistake will cause you to come up way short. Based on Kantrowitz's projections, you'll have less than a third of what you need to cover four years. So do your homework — use calculators, found online on Web sites like www.collegeboard.com and www.collegesavingscrunch.com, to add up how much you'll really need when it comes time to send your tike off to school.
• Financial aid will not always come to the rescue. The AllianceBernstein study found that 68 percent of parents think that, based on their finances, colleges will design a reasonably affordable financial aid package. On the other hand, 92 percent of aid administrators surveyed said that parents overestimate the amount of scholarship and grant money their kids will receive. The truth? Financial aid encompasses several forms of aid, including loans, scholarships, grants and even work-study. Financial aid administrators are there to help you, but that doesn't mean they can't say no. It's their job to distribute the college's financial aid money fairly among those who qualify, so what you get could depend largely on the year, and on the college. "Parents have a false sense of security that scholarships, grants, and colleges themselves will help them come up with the money," says DeLong. The bottom line is that, while financial aid is there to help you, and you should certainly max it out as a resource, it is not meant to replace a savings plan.
• Talent does not necessarily translate into scholarships. Your kid could be a track coach's dream, or star of the high school football team, but don't bank on that covering his college education. According to Kantrowitz's book, only about 1 percent of college students receive athletic scholarships. So while it's important to push your kid to excel in the classroom, you shouldn't count on any particular talents providing a free ride. Seventy-eight percent of the aid administrators surveyed by AllianceBernstein said that parents' expectations for significant merit scholarships interfered with their efforts to save. No matter what you think the future holds for your child, don't scale back on your savings goals.
• You need an effective savings plan. "Many parents expect their children to go to school, so the cost of college is not an unanticipated expense. It is something that parents, and grandparents and other family members, should be planning for early," says DeLong. Unfortunately, many are not, according to the study: 72 percent don't have a plan in place that takes into consideration all of their financial goals, and 42 percent have not talked to their spouse or child's other parent about financing his education.
• Getting it together starts with having a separate account. Not only will mingling your funds in a checking account cause temptation, but it won't make the most of your money. The options are vast, but 529 accounts are one of the best bets these days. This year's Pension Protection Act finally mandated withdrawals from these accounts used to finance higher-education expenses will be permanently tax-free.

Finally, I've said it before, and I'll say it again. It's important to remember that despite the findings of this survey, retirement should not take a back seat to college. While financial aid might not be as prevalent as parents think, when it comes to retirement, it is non-existent. You simply cannot borrow for retirement like you can borrow for college. So write down all of your savings goals, and then figure out how much you can contribute each month to make them realities. If your employer matches your 401(k) contribution, you should always max that out first.

Additional reporting Arielle McGowen.

• Money 911 with Jean Chatzky   Experts offer financial advice   How to save for retirement   How to manage your debt   When to start saving for college   How to balance your debt

  Jean Chatzky is an editor-at-large at Money magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show" and is also a columnist for Life magazine. She is the author of four books, including "Pay It Down! From Debt to Wealth on $10 a Day" (Portfolio, 2004). To find out more, visit her Web site, www.jeanchatzky.com.

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