Ask Mr. Dad: It’s never to early to start kids’ college fund

Dear Mr. Dad: My wife and I took our teenage son, a high-school senior, to visit a few of the colleges he’d like to apply to. For the most part they seemed great, everything a parent could want for his child – except affordable! How does anyone afford college these days?

A: I’m so glad you wrote – my daughter and I just came back from a similar trip and I was amazed that admissions directors could actually say the words, “$52,000 per year” with a straight face. Unfortunately, though, tuition sticker shock is no joke. According to the National Postsecondary Student Aid Study, two-thirds of four-year students graduate with an average student loan debt of nearly $20,000. One-fourth of those students borrow $24,936 or more, while a tenth borrow $35,213 or more. Those figures are probably a little lower for state schools, a lot higher for private schools.

With a high school junior, where your son goes to college will depend on your honest answers to these questions:

“How much do you have saved for your son’s education?

“Excluding loans, how much financial aid, scholarships, and grants, can you put together?

“After all that, how much can you afford to pay?

“If there’s still a shortfall, are you willing to borrow money?

“How much money debt is your son willing to take on?

For those readers with younger children, the bad news is that tuition costs have been going up at twice the rate of inflation and there’s no indication that trend will slow down. The good news, though, is that you’ve still got time to load up your child’s college savings plans.

Some financially prudent parents set up a college fund before they have kids. Others start when the child is born. Sooner is better to give your investment time to grow and to weather market fluctuations. For most people, the 529 plans (named after an IRS regulation) are the best option, allowing you to put away several hundred thousand dollars, which will grow tax-free and can be used for tuition, room, board and fees, at almost any post-secondary institution in the country. Each state has slightly different limits, fees, penalties and tax implications, so check with savingforcollege.com before you solidify your plans In addition, grandparents and others can contribute to a child’s 529 account. You might also want to look into prepaid plans, which allow you to lock in future tuition at today’s prices. But be sure to read the fine print.

Slower-growing but more secure investments like savings bonds, treasury bonds, and money market accounts can yield solid returns over time. Check with your financial advisor, start early and contribute often.

When your kids are old enough to get jobs, encourage them to contribute a modest amount, say 10 percent, to their own college fund. That will give them a stake in their own education and could instill a sense of self-sufficiency.

Colleges and universities offer many kinds of scholarships, so apply early, at least a year before you plan to register for classes. You’ll need to submit a FAFSA form (fafsa.ed.gov) that will determine the amount of financial aid to which your teen is entitled.

There are also tons of private and government grants and scholarships. The PELL is a common government award. Community groups and businesses often make grants to deserving students. You and your wife should definitely check with your employers to see whether they do the same. If you look carefully, there are also hundreds of smaller, specialty grants out there, many with obscure requirements, such as being left-handed, having a relative who served in World War I, having a particular last name, or pursuing a particular major.

If loans are in your future, start checking into your options right now. Get to know the college’s financial aid advisor and ask him or her to explain each type of loan to see which one you might qualify for.

Be sure to get your son involved in as much of this as possible – it is, after all, his education we’re talking about. A great resource for both of you is David Rye’s “Financial Aid for College” (in the Complete Idiot’s series), along with free Web sites like fedmoney.org and fastweb.com.