Savings Plans for College, and When to Start Saving

For many families—even those with significant savings and means—the cost of college has become daunting. According to FinAid, the nation’s current student debt amount is rising at a rate of $2,698.30 per second.

CollegeBoard reports that the average cost of tuition and fees with room and board is now $20,770 per year for public, four-year in-state school and $46,950 for private nonprofit four-year school—and these figures continue to grow faster than the rate of inflation.

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This has caused families and their students to stretch all financial means available, sometimes without fully understanding their options.

Independent nonprofit organization The Institute for College Access and Success, reports on the wide range of average debt by state in their Project on Student Debt, and their other published data sets report that private loan borrowing is increasing, asserting that almost half of all private loan borrowers (by Stafford Loan Usage) could be using more affordable federal loans.

If you are unable to fully fund a college student’s education with your own resources, how can you best avoid having to take on overwhelming debt?

Here are some key tips that might help your child or you avoid taking on more debt than is needed.

  • First things first: when to start saving for college? Start saving as soon as possible—ideally in a state 529 plan. Every dollar saved (and growing tax-free in a 529 plan) lowers the amount a student will have to borrow. The earlier you begin saving, the more there will be to grow. Consider allocating a portion of each paycheck, or (or in addition) making sizable deposits at every holiday and birthday over the years. Make your child aware of your tactics, and the fact that you're giving them gifts of financial security.
  • Apply for any scholarship for which the student might be eligible. There is no cost to do this and you just might uncover some substantial aid. Fill out the FAFSA (Free Application for Federal Student Aid). Look into resources offered by organizations like your local library, community foundation, Rotary, private clubs, and do research on the internet. The competition has heated up along the scholarship path but it’s still worth the effort. Don’t be afraid to ask the school you are applying to for aid—many are now offering aid to families who earn $200,000 or less.
  • Having two kids who are close in age will help with your financial aid eligibility—it essentially reduces the burden parents are expected to carry on each child. One way to affect this is have an older child delay going to college by a year.
  • With regards to savings plans for college, avoid putting assets into the name of the student. Assets held in the name of the parents have less weight in calculating financial need. Put money into a 529 plan rather than in a custodial account, like an UTMA. An UTMA is considered the student’s property. A 529 is not.
  • Although money set aside by a grandparent in a 529 plan for a child does not factor into financial aid calculations initially —distributions from grandparent-owned 529s are heavily factored. Parent-owned 529 distributions, however, aren’t factored at all.
  • On the flip side, do not ever count on getting any kind of a “full ride” or scholarship. Stories abound of students who were star athletes in high school, but injure themselves so no longer qualify as prospects for the colleges. According to affordable college planning expert Lynn O’Shaughnessy: fewer than 0.3% of students will receive full ride scholarships. But about two thirds of all undergrads receive some kind of financial aid, including student loans.
  • If at all possible, avoid selling assets the year before applying for aid—this can have the unpleasant side effect of raising your reportable income for that year, which would reduce your qualification for financial aid (withdrawals from IRAs or converting a traditional IRA to a Roth IRA can hit you like this). The ideal thing is to have this money already set aside in a 529 plan, so that all gains remain untaxed—but you are still able to move your portfolio to a more conservative model so that you do not have to worry about being hit by the market.
  • Last, even after all of these steps, if you do not have enough to pay, whether that be from the 529 or financial aid, do not fret. We have found that children who have some level of financial “skin in the game” are far better equipped for the financial realities they will face after graduation. This includes having a better handle on the basics of budgeting and understanding where their money goes each month; a skill they will undoubtedly need to learn to be financially independent and successful. Having them take on part-time job at the school’s library to pay down a portion of their student loans or ongoing monthly expenses can be a very healthy approach to financial education.

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Paying for college is likely going to be an expensive affair no matter how you save, but it’s a worthy investment. The more early planning you can do together can ultimately save you significant sums, and can teach your child valuable economic lessons before they even start college. 

Mosaic can help you learn more about any of these strategies, or help you think longer term about your college funding needs. 


For more tips toward financial well-being for the whole family, join the Mosaic Financial Fitness Challenge. 


Topics: Financial Planning, Saving, Budgeting and Debt Management, Kids and Money