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May 20, 2008 11:23 pm US/Central
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Learn The Best Ways To Save For College
By Frank Vascellaro and Amelia Santaniello
(WCCO)
A recent study found Minnesota public colleges cost almost twice the national average. That's bad news for parents already struggling to fill their families' refrigerators and gas tanks.
The good news -- if parents save strategically, they can put their children in a better position to receive more financial aid.
"This whole concept of college planning creates anxiety-ridden households, especially when the children are getting closer to college age," said Phil Curoe, an investment advisor with Topline Federal Credit Union.
Curoe said a lot of people think they make too much to get financial aid.
"You can actually get financial aid no matter how much you make," said Curoe. "Part of the way to get financial aid is you have to fill out the FAFSA form."
FAFSA stands for Free Application for Federal Student Aid, and parents will fill out those forms in your child's senior year of high school and every year they're in college.
Filling out the FAFSA is a lot like doing your taxes. You will need a lot of financial information at hand.
"You're gonna factor in your income, your child's income, the parents' assets, and the child's assets," said Curoe. "And they're all factored differently."
The government expects students to use more of their assets for college, so they factor the child's money at 20 percent. Parents' assets are only factored at 5.6 percent.
Things like your house and your retirement plan don't count. Also exempt are life insurance cash value, variable annuities, parents' cash reserve and small businesses with fewer than 100 employees.
"The big, critical part is where your assets are located by the time you fill out the FAFSA form," explained Curoe. You need to get your finances in order by December of your child's junior year because FAFSA uses the previous year's tax return.
There are also 529 Plans, a state-sponsored college savings plan that lets your money grow tax-free.
"They're great plans," he said. "But there are some schools that actually count 529 Plans as an asset of the child."
So what is the best way to save for college?
Curoe recommends using your retirement plans. Put extra money in a Roth or traditional IRA. It won't count on the FAFSA, and you're allowed to pull the money out for college.
With a Roth IRA, your principal comes out first. If you use that for college and leave the interest in your account, you won't have to pay any tax.
Curoe cautions against tapping into your 401(k) plan. He said it's best to keep your hands off that retirement money. Your kids can always take a loan for school, but you can't take out a loan for retirement.
The IRA saving strategy can work for your children, too.
"If they have W2 income," said Curoe. "The child can actually put some of that money into a Roth IRA if they like."
Your children could pull out the money a few years later. As long as they're using it for college, they won't be penalized.
Of course, there are things your children can do at school to improve their chances of getting aid. If they participate in extracurricular activities, especially in a leadership role, they will improve their chances of receiving merit scholarships.
It's always pays to earn high grades in challenging classes. Your children can even get some college classes out of the way if they take part in International Baccalaureate, Advanced Placement, College in the Schools or Post Secondary Enrollment programs.
Paying for college can be overwhelming, but your children will be college-age before you know it. So take a deep breath, and if you haven't already started, get saving.
(© MMVIII, CBS Broadcasting Inc. All Rights Reserved.)