Whether your child’s college years are miles down the road or right around the bend, there’s a way to fund those ever-rising tuition costs.

By Emma Johnson
Updated August 08, 2012
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Illustration of a bunny driving a car full of carrots
Credit: Brian Rea

Your Child Is: Newborn to Age 7

The challenge: You want to save for college right out of the gate (and, hey, good for you!), but you are not sure how to begin.

Your best savings plan: First things first: Before you put one red cent away for Stanford or State U, make sure that you have attended to more urgent money matters. You should have amassed at least three months’ worth of emergency savings (enough to cover your mortgage or rent, food, utilities, and transportation costs) and invested in your own retirement account, meaning you are saving enough in your 401(k) or 403(b) to earn the company’s match or are socking away at least 10 percent of your gross income (up to $5,000 a year) in an IRA. “You want to make sure you’ll have enough savings for retirement, so your child won’t have to worry about you and you won’t become a financial burden to her,” says Kristin Harad, a certified financial planner in San Francisco, who works mainly with families with young children.

Once your long-term finances are on track, the best place to start saving for college is a state-sponsored 529 plan, a type of investment fund that allows your earnings to grow, tax-free, as long as you ultimately apply the money toward higher-education costs. What’s more, your state may offer additional tax breaks, like a full or partial state-income-tax deduction on contributions. You can invest in any state’s plan; fees and plan specifics (such as investment options and additional benefits) vary greatly. To compare, go to savingforcollege.com. Worth mentioning: Be sure to open a 529 account naming you (not your child) as the owner to minimize the impact on her financial-aid eligibility and to make sure the funds are used “according to your intentions,” says Kalman Chany, a New York City–based college-financial-aid consultant and the author of Paying for College Without Going Broke ($20, amazon.com).

Of course, every parent wonders how much to save. And with years to go before college starts, there is really no way to know the amount that you will need. (How can you expect little Henry to root for the Yale Bulldogs or the Georgia Bulldogs when he is not even potty-trained?) However, you can get a rough idea of how much you should stash away annually by using the college-savings calculator at finra.org. When making your allocations, put around 80 percent of your portfolio in riskier investments, like stocks, since you have more than 10 years before you will need the money, says Harad. Then invest the remaining 20 percent in more conservative bonds.

Your Child Is: 8 to 14

The challenge: Time is flying by. You meant to save, but you have put away barely anything. (Who can swing that with child-care costs?)

Your best savings plan: No need to panic. There’s still time to put aside cash. Try to set a minimum amount to save each month and stick to it, even if it’s just $50. (If college is a decade away, you will have saved at least $6,000 by the first day of school.) And remember: “Any savings is better than none at all,” says Chany. Keep your portfolio only moderately risky, with about 25 percent invested in stocks and the rest in bonds.

Now is also the time to start thinking about the major money decisions that you might be facing in the upcoming years. When awarding financial aid, universities calculate the family’s annual finances starting on January 1 of the student’s junior year in high school. So if you plan to withdraw money from a retirement account, sell a rental property, or sell a lot of stocks that would net capital gains, consider doing it soon so your profits will not factor into your child’s aid eligibility.

Your Child Is: 15 and Up

The challenge: If you could not (or just did not) save, you’re feeling that time is not on your side.

Your best savings plan: It’s not too late to put money into a 529 plan if you can: Invest 70 percent in bonds and 30 percent in cash. No extra cash? Don’t divert money from your retirement account to your child’s college fund. Your child can apply for aid, says Harad, but there is no similar relief for retirees.

Instead, devote your energy to seeking out financial-aid opportunities. You won’t be alone: Two-thirds of students receive some assistance, according to the U.S. Department of Education. Be sure to fill out the Free Application for Federal Student Aid (fafsa.ed.gov), which makes your child eligible for hundreds of federal and state need-based grants and loans. This is also used by most schools to determine aid packages. Be prepared to fill out additional applications for some schools. It’s also worth calling the financial-aid office at each college and asking about specific merit-based scholarships (for athletics, academics, and the arts). Look for additional scholarships that are not specific to one school at bigfuture.org or scholarships.com.

If your child has already been accepted to a university and you have applied for assistance but received less than expected or were denied, call the school’s financial-aid office and ask for a reassessment. The amount of aid could increase if your situation has changed (say, you lost your job) or if you have a costly burden that is not easy to explain in a form, such as caring for an elderly parent. Say, “Recently my financial situation changed. Here’s what’s happened,” and present your case. Also mention if you’ve been offered a better aid package from a rival school, says Chany. If your child is viewed as “highly desirable”—and why wouldn’t he be?—the school may pony up more assistance.