Financial journalist Kathy Kristof, author of "Taming the Tuition Tiger" and "Investing 101," shares tips on saving for college.
Q: How do I know how much to save when tuition increases are unpredictable?
A: You won't know how much to save. It's simply not possible to know what your child will want, where he or she will get in, what that college will cost and whether your child will qualify for scholarships, grants or other aid. Rather than trying to predict tuition costs, think about what you'd like to do and set a goal based on that.
In other words, if you'd like to give your child $10,000 or $20,000 a year for four years, you'll need between $40,000 and $80,000. Assuming you have 15 years, you'd need to save about $250 a month to get that $80,000 nest egg.
Q: Should I invest in the 529 plan in the state where I live? Or in the state where I think my child might attend college?
A: The only advantage to investing in a 529 offered by the state in which you live is that some states, including Arizona, offer tax deductions for 529 contributions. If your state is one of them, that would favor investing there. Otherwise, look for the 529 that has the lowest expense ratios and investment choices you like.
Q: What's the advantage to investing in a 529 versus a regular savings account?
A: You don't pay tax on investment earnings as they accumulate and only pay tax on your gains if the money is not used for qualified college expenses. In addition, you have lots of investment choices. You can find 529s with really low fees, and they allow small regular investments for those who can't afford to sock away huge amounts at once.
Q: Will saving money for my kids' college education make them ineligible for financial aid?
A: Not unless they have so much in savings that they don't need aid, in which case, it would be silly to whine. That's like complaining that you can't collect unemployment insurance because you have a job. The biggest factors determining your eligibility for aid are your income and the cost of the school. Savings reduces your aid by about 6 cents per dollar when it's in the parent's name, and about 30 cents per dollar of savings when the money is set aside in the name of the child.
Q: I'm pregnant. Can I set up a 529 now or do I have to wait for my child to be born?
A: Legally, you can set the account up now because 529 assets are transferable to a new beneficiary.
Q: I can't afford to save much. How can I improve my kid's chance of getting scholarships?
A: Emphasize grades. The better the student, the more likely schools will compete for him or her. Competition among schools can get you more aid. Also, this may be obvious, but fill out those financial aid forms early and completely.
• Pay4CollegeArizona What: Advice from the Arizona Commission for Postsecondary Education on preparing for - and paying for - college. Online: Pay4CollegeArizona.gov
• AZ Family College Savings Program (529 Plan) What: Download a free planner and get info on the state's college savings plan from the Arizona Commission for Postsecondary Education. Online: az529.gov
Estimating the cost of college
Download a free college savings planner at www.az529.gov/AZ529Website_2010/index.html
Steps to saving for college
Define savings goals
Determine how much you want to save for your child's education. Do you want to save for tuition only or room and board, too? All four years of college or just two? Public or private college?
If your child is young you can afford to save in smaller amounts and let your money grow over time.
Save all you can afford
Even just $25 a month can add up over time. The key is to get started and gradually increase your monthly savings over time.
Use automatic transfers
Take advantage of convenient ways to save such as payroll deduction or automatic transfers from your bank account.
Consider a 529 college savings plan
The 529 Plan is designed to provide a parent, grandparent or anyone else an opportunity to save for a child's educational dreams within a tax-deferred savings vehicle. Each state has one.
Another option - Coverdell Education Savings Account
This type of account lets people put away $2,000 per beneficiary, per year. The money and the earnings in the account are not taxed until the funds are withdrawn. Withdrawals are taxed only if they are not used to pay for qualified education expenses. There are income restrictions - your modified adjusted gross income for 2011 or 2012 must be less than $110,000 ($200,000 in the case of a joint return).
Contact reporter Alexis Huicochea at email@example.com or 573-4175.