Newborn to age 7:
Once your emergency fund and 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.
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. 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% of your portfolio in riskier investments, like stocks, since you have more than 10 year before you will need the money. Then invest the remaining 20% in more conservative bonds.
Ages 8 to 14:
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. Keep your portfolio only moderately risky, with about 25% 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.
Ages 15 and up:
It's not too late to put money into a 529 plan if you can: invest 70% in bonds and 30% in cash. No extra cash? Don't divert money form your retirement account to your child's college fund. Your child can apply for aid, 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. If your child is viewed as "highly desirable," the school may pony up more assistance.
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