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Special section Experts' 8 smart moves for '08

There are eight things to keep in mind if you are saving for college in the coming year, says the College Money Guru.

8 smart college money moves

8 smart college money moves in '08

5. Plan ahead for financial aid. Interest rates on government-subsidized loans are headed lower, making them even more attractive as college-financing tools. For the school year 2011-12, eligible students receiving a subsidized Stafford Loan will lock in a 3.4 percent interest rate.

Also, expect to see the government expanding the list of post-graduate professions eligible for income-contingent repayment schedules and loan forgiveness. Demonstrating financial "need" through the Free Application for Federal Student Aid (FAFSA) application process thus becomes more important. Steps you take now can enhance your child's financial aid prospects in the future.

For example, avoid placing investments in your child's UTMA, because those assets will count heavily against aid eligibility.

However, while it is good to plan ahead, don't spend too much time preparing for financial aid before your child reaches high school. Chances are the eligibility formulas, as well as your personal financial situation, will change significantly by the time your child gets to college.

Read Bankrate's "13 financial aid traps" to make sure you don't trip yourself up when planning for financial aid.

6. Start saving early. With college costs increasing at an average annual rate of close to 6 percent, it's best to start a college savings fund early in your child's life. The monthly college savings budget is $623 if you plan to fully fund four years at a private college currently costing $25,000 per year and begin saving when your child is 1 year old.

However, waiting until your child is 11 to begin saving will require you to save $1,047 per month. These projections assume 6 percent annual cost increases, a 7 percent after-tax annual investment return, and monthly deposits continuing through the month of college graduation.

Don't despair if such savings targets seem out of reach. Any amount you can set aside for college now will help reduce the amount of debt you or your child take on in the future.

7. Keep your retirement fund for retirement. Most financial planners agree that your own retirement should be your first savings priority. Take full advantage of an employer match of your contributions to a 401(k) plan and strongly consider setting aside money each year in a Roth IRA if you are eligible to do so.

When it comes time to pay for college, you may be tempted to tap retirement accounts to pay college bills. But in most situations, you will be better off keeping retirement accounts intact and taking out loans for your child's college expenses. Distributions from 401(k) plans and IRAs will not only hurt your child's eligibility for financial aid in the following year, but may increase the chances that you become financially dependent on your children later in your life.

8. Use rewards programs. Everyone likes "free money." Several companies now offer rewards programs that link directly to one or more 529 college savings plans. Over time, your purchases can generate rebates that add up to hundreds, and potentially thousands, of extra dollars for your child's college education.

The largest such rewards program is the Upromise Rewards Service, and others include Futuretrust, Little Grad, and BabyMint. Fidelity Investments offers a 529 rewards American Express card that includes a 1.5 percent rebate on your card purchases for direct deposit to any one of the five Fidelity-managed 529 plans. Just remember, the programs are "free" only to the extent you don't end up spending more than you normally would for goods and services.

-- Posted: Dec. 26, 2007
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