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Pay It Forward

Baby makes three — and a college savings plan

About the author

Kate Ashford is a New York-based freelance journalist who writes about personal finance and health. She has written for Money, Real Simple and Redbook magazines.

(iStockphoto)

(iStockphoto)

Tobi Kosante put herself through college and graduate school after her father’s medical bills drained the family’s college savings. She survived on grants, teaching assistant work, and loans that she paid back for years after graduating. It’s a situation that is not uncommon in the United States, where post-secondary education isn’t subsidized by the government. More than two-thirds of U.S. students receive some amount of federal, state, or university-granted financial aid.

She doesn’t want her 8-year-old daughter, Jemma, to have the same experience. “I don’t want my daughter to have to work in school,” said Kosante, who lives in Hempstead, Texas. “I want her to be able to concentrate on her studies. I can’t think of any gift I could give her that would make an impact on her life as much as ‘Just relax, I’ve got everything covered.’”

Kosante and her husband, both geologists, started saving for Jemma’s education when she was a toddler. Today, they have more than $32,000 tucked away. They’re currently setting aside $500 from every paycheck--10 times the $50 a month they were saving originally. Despite the strong start, Kosante says she’s a little panicked as the price of college keeps rising. The average published tuition and fees for in-state students at public four-year schools rose 4.8% in 2012, and has gone up by 27% beyond the rate of inflation since 2007, according to the College Board.

“We can easily develop a fatalistic view if we start with, ‘Gosh, look how expensive college can be,’” said Tim Maurer, a financial advisor in Hunt Valley, Maryland. But it doesn’t have to be that way. Here is what experts say you will need to save for college costs:

What it will take: If you expect to pay for the whole shebang, plan to set aside $350 a month from birth to cover an in-state public four-year school; $700 a month to cover an out-of-state four-year school; and $1,050 a month to cover a private four-year school, Maurer says. (He assumes a 7% rate of return.) The all-in expense total at most four-year schools today is roughly $23,000 to $45,000 per year, and experts estimate a 5%increase per year, on average, going forward. That means for today’s 8-year-old, the low-end sticker price of a four-year college will be about $170,000.

Of course, only about one-third of students actually pay the sticker price for college, according to the College Board. Grants and scholarships cut the average college student’s tuition costs in half, according to Debt.org, which means saving about $85,000, on the lower end, for that 8-year-old. Saving less than that sum isn’t futile either: every dollar you can put away is roughly two dollars you (or your child) won’t have to pay back in loans, said Mark Kantrowitz, former publisher of Fastweb and FinAid and current publisher of Edvisors.

How long you need: If you can, start from birth. If you save just $25 every month from birth and earn 6%, you will have about $9,300 by college age. Put $100 away monthly and you will have more than $37,000. (If it still feels paltry, just imagine what you’d feel like without even that much.) The power of compounding interest will do more for you now than throwing large sums of money into savings when, say, the kids reach high school.

Do it now: If you are in the US and aren’t already contributing to a 529 plan,start. A 529 is a tax-advantaged savings plan designed just for college savings. If you get a tax deduction for contributing to one of your state’s plans, that’s probably your best option, experts say. If not, the country is your oyster—and Morningstar’s ratings of top 529 plans are a good place to browse. Set up an automatic transfer from your checking account into a 529 every month. If you start small, bump up the total when you can, like when you get a raise at work. But financial experts warn: never sacrifice retirement savings to fund a 529 plan. As a rule of thumb, stow about half of your college savings goal in a 529 and half in a brokerage account, say advisers. That way you won’t be stuck if your child gets significant scholarships or decides on a cheaper school.

Watch out for: Your money should be invested more conservatively as your child nears college age. If your savings are in an age-based fund, that should happen automatically, but keep a close eye on fund options in the plan.

“Within the next few years we could find ourselves in a very unique place where bonds are riskier than stocks,” Maurer says. “And you could be shifting into bond portfolios that are almost destined to get clobbered.” As college nears, a money market may be your safest bet to preserve the money you have saved up.