Saving Money for College

An effective savings program for college is the most surefire way to plan and pay for higher education expenses. As Mark Kantrowitz from FinAid puts it, "It is cheaper to save money for college than it is to borrow money for college." But this is easier said than done.

Saving money for college is hard for many families when income is limited. If a family has barely enough money to pay for food or rent, saving for college no longer becomes a necessity. Even if a family begins to save money for college early, circumstances may change over time, preventing continual savings contributions. For example, if a family has no stable health-care coverage and someone gets sick, then money for college savings is rerouted to medical care.

But, surprisingly, even families with stable income do not reserve savings for college. It is not uncommon for families to have very little savings for long-term goals, whether for college or for retirement.

Ultimately, college savings programs depend on the parents. Students themselves have little ability to make any effective college savings efforts and must rely on their parents to follow through. Even if a student is able to pick up some extra cash waiting tables and mowing lawns, they are most likely old enough to be nearing high-school graduation, leaving little time for their own college savings to grow.

Considering that most average families are in no position to save, it became even more surprising for me as a financial aid officer when an average middle-class-income family would walk into my office with a tremendous amount of college savings allocated for the student. What was the magic behind this family's ability to save? How was it that they made it happen? What did they do? Why are they so special?

Part of my work in assisting students (and their parents) with the college funding process was to review a family's financial circumstances through the verification process. During this process, I was required to review tax and asset information of the family to confirm that it matched the data supplied on the FAFSA.

It was during these times that I got to meet a lot of wonderful people, and had an opportunity to ask a lot of questions. In particular, I got to pick the brains of parents who were able to make substantial savings with only modest income, and here is what I found out.

1. Parents who want to save money for college make it a priority: Saving is a mind-set. It is a way of thinking. When anyone saves money, his or her mind is already thinking ahead about future demands and makes a conscious decision to forgo current demands with the money in hand. This is accomplished with every paycheck by allocating money directly toward savings programs before other expenses creep up and take it away.

   This takes discipline. When money is in hand, it is easy to spend it on whatever is in front of you, like the tons of consumer products available in the economy. What is hard is focusing money long term by saving it so it can grow into a viable asset in the future. Parents deal with this challenge by committing a set dollar amount from each paycheck to go to savings no matter what to ensure that savings continue to grow.

2. Parents utilize savings programs to avoid taxes: An effective college savings strategy is only complete when money is allocated into savings programs that can help avoid taxes. Saving money in a checking or savings account is not the way to go. You should instead use a 529 plan. All the money saved in a 529 plan can be withdrawn tax-free to help pay for qualified higher education expenses. Make sure college savings are going into the right savings vehicles.

3. The students learn the power of saving: I found that the parents who took their college savings seriously also imparted this concept to their children. That is because the child could see and recognize that the parents went out of their way to make sure money was being saved, even if income was not that high. The child may not have understood why many of their friends had more toys than they did growing up, but it made so much sense when they were able to pay for college costs effectively.

4. Parents that owned their own business had an intuitive understanding of this process: Now, this is anecdotal evidence based on my own personal observations, but I did notice that several students whose parents owned a business had very effective savings habits. I believe this is a result of the parents' knowledge of how to manage money in a business being extended into personal affairs, as the skill and mind-set for saving is apparent.

   This is not to say that anyone cannot adopt this mind-set, but I was always shocked by the way some parents who are high-income professionals seemed to ignore savings altogether. High-income parents who do not save money for their kid's college leave the child in a tough spot because they will not qualify for any need-based financial aid, but may not be making high enough income to simply pay the whole bill outright. In these cases, the family must rely on financing where scholarships are not available, further driving up the real cost of college through loan repayment.

Ken O'Connor is a financial aid expert and the director of student advocacy at cuStudentLoans.org. Learn more about credit union private student loans and college planning by visiting his blog.

Published May 2, 2011