Paying for Your Child's College Education: A Timeline

US News

Earlier this year, the Federal Advisory Council, a group of bankers that advise the Federal Reserve's Board of Governors, warned that the growth in student loan debt has "parallels to the housing crisis."

Housing has rebounded, but student loan debt doesn't seem poised for the same fate. The average cost to attend an in-state public college for the 2012-2013 academic year was $22,261, and that doesn't include housing, meals and various fees. And that's just one year - multiply it by the traditional four years of college, and you get $89,044. If you have two kids, multiply that four-year degree by two ($178,088), and you can see how parents can spend almost two decades struggling to save up for college, and when they can't, how their kids can spend years paying back loans.

Obviously, saving money earlier rather than later is the key to successfully paying for college. So if you haven't started saving, or if you're having a baby and wondering how to pay for your future college graduate's education, here's a timeline of reminders and strategies to consider as the years go by.

For those who are expecting a baby, or if your baby just arrived...

The situation ahead: You have 18 years before your little one goes to college, so if you're thinking about paying for college along with cribs, smart move. In Kal Chany's book, "Paying for College Without Going Broke," published last year with a forward written by former President Bill Clinton, Chany looked at inflation rates and concluded that by 2030 - when a newborn today will be 17 and applying for college - the average price for a state university will probably be $41,228 a year. The average price for a private university: $130,428 a year.

[Quiz: Are You Spending Too Much on Your Children?]

What you should be doing right now: "Set up a 529 plan, and save as much as you can," urges Kevin Michaelsen, director of financial assistance at Meredith College in Raleigh, N.C. "Encourage grandparents and relatives to start saving in separate 529 plans too."

The 529 is attractive because the money in the account accumulates, tax-deferred, and no income tax is taken when the funds are withdrawn, providing the expenses are actually for college (i.e., tuition, fees and supplies).

More to consider: You can find and put money into these 529 plans with a few clicks on a computer. One of the best directories is SavingforCollege.com, where you can see if your state offers a state income-tax deduction or income-tax credit on your contributions (49 states and the District of Columbia have 529 plans; Wyoming doesn't). You can put your money in any state's 529.

There are other college saving vehicles such as the Coverdell Education Savings Account, which allows no more than $2,000 a year to be contributed to the account. Still, the 529 is by far the most popular way to save for college.

If your child is 6 years old...

The situation ahead: Age 6 is arbitrary; the larger point is that one-third of your time to save for your child's college education has passed. Still, you have 12 years - no need to panic.

What you should be doing right now: "Really, all the things you do for a newborn versus an older child, it's all the sort of same things you would do when they're younger, but you have a shorter time horizon, so you need to put more away," advises Richard Polimeni, the director of education savings programs at Bank of America Merrill Lynch, the corporate and investment banking division of Bank of America.

In other words, if you haven't opened a 529, this would be a good time.

More to consider: If you have been socking away money into a 529, but feel you should put away more, Michaelsen suggests: "Since your student is at school-age now, try to save the amount you paid for preschool or day care expenses, and put that in the plan."

If your child is 12 years old...

The situation ahead: You only have six years to save for your child's college education. It isn't too late, even if your child is a bit older than 12, but the older he or she gets, "the advantage of tax-deferred growth in these savings is diminished," says Rick Scott, an associate professor of finance at Saint Leo University's Donald R. Tapia School of Business in Saint Leo, Fla.

What you should be doing right now: Hopefully you've been putting money into a 529 plan for some time now. If so, keep doing it.

"If you haven't, set up an automatic withdrawal from your checking account every month," Polimeni suggests. "After a couple pay periods, you sort of won't feel its absence any longer."

More to consider: There are fees associated with 529s, like the program management fee, which takes less than 1 percent of the savings each year. You could instead opt to put money into a custodial account reserved in your child's name, but those are subject to taxes, and when your kid comes of age, he or she could technically use it for whatever he or she wants - like buying a motorcycle.

If your child is 18...

The situation ahead: It's almost time, and you've saved ... virtually nothing. Don't beat yourself up. That won't help your child, and life is expensive and difficult; not everyone can put money away. Start researching loans and scholarships.

[Read: 10 Financial Tips for College Grads.]

What you should be doing right now: As for loans, you can complete a free application for federal student aid at www.fafsa.ed.gov, and if the university requires it, a College Scholarship Service financial aid profile application. Both give lenders information to determine your eligibility for financial aid.

"Limit your scholarships applications to those that you have the best chance at," Michaelsen says. "Often, those are state and regional ones. Focus your search on organizations, churches and groups that you have a personal involvement or connection. Don't forget to ask employers about scholarships."

Michaelsen also suggests asking the college about payment plans, which are often interest-free.

More to consider: When an educational institution determines your financial aid based on your needs, your assets aren't created equal, Scott points out. He says if you have $300,000 worth of stocks, bonds or CDs, which perhaps you were planning on using for retirement, you are going to have a tougher time getting money. But if that same $300,000 has been parked in an actual retirement account, or you have $300,000 in home equity, that's another story; the money won't be used against you when determining need-based financial aid.

[See: 50 Smart Money Moves.]

"The reasoning here is that a parent should not have to sell their home, take a second mortgage or plunder their own retirement account to pay for college," Scott says.

That is logical, but much of the way money is allocated to college students isn't. Of course, one wouldn't want to punish a penniless high school student who aspires to go to college but doesn't have parents who support that goal. But as Scott says, "We have a financial aid system that punishes those that save for their child's college and rewards those that do not. Colleges take into account how much you've saved for college when they are awarding need-based financial aid and loans. If you save more, you get less."

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