College Financial Planning: From The Cradle To The Dorm

Smart college financial planning starts when your child is still in diapers. That might sound extreme now, but even "bargain" state schools are expensive. You and your child will be much happier if you establish a nest egg and give it time to grow. These tips can help you set financial goals as your child takes the path toward college.

Baby Through Preschool Years
Start saving for your child's education now by investing in a 529 Plan. A 529 Plan allows you to invest money now and withdraw it tax-free when it is time for your child to attend college. And, if your child does not attend college, you can transfer that money to another child, to yourself or to another immediate family member. Some of these plans involve pre-paying tuition at a certain school, but try not to limit yourself. You cannot predict that your child will go to a specific state school at this stage in the game, so you should choose a flexible investment plan.

You can also save in a Coverdell, which is similar to a 529 Plan, except that money in a Coverdell can go to elementary and secondary school. However, the money in a Coverdell will belong to your child when she turns 18, and many parents would prefer to have more control over that money.

It is also advisable to keep college savings in your name, not your child's, throughout your child's time in college. Otherwise, you might lose financial aid. Aid offices expect students to put 35% of their savings toward education, whereas you are expected to contribute around 5%.

Elementary School Years
Keep stashing money in your investment plan. Depending on your plan, the younger your child, the more aggressive you can be with your investing. However, don't forget to save for your own retirement along the way, and put more of your savings into your retirement, not into your child's education. You also need to start thinking in the long-term and give your savings time to grow before you retire. Keep in mind that, if you have given your child a sound financial education, she should be able to handle the responsibility of paying her student loans-and that will be less expensive than caring for you should you not have enough money for retirement.

High School Years
At this time, your child will start to take the lead. Encourage her to put together a list of schools she would like to attend in different price ranges. If your child is gifted, she should have the motivation to talk to her guidance counselor and start investigating scholarship options. If your child really isn't sure what she wants to do with her life, that's absolutely okay, but she might want to consider attending a less expensive school so she can try out different majors and have a little fun without having to worry about a high financial penalty down the road.

Discuss the issue of student loans with your child early on. Your child will be responsible for these loans upon graduation, and her career choice might impact how quickly she can pay off those loans. For example, she might have more loans in total if she goes to college and law school, but she might be able to pay off loans faster with a higher lawyer's or doctor's salary.

Check your 529 Plan to confirm that your investments are growing more conservative as the time comes for your child to attend college. Some 529 Plans will do this for you, but, if you have had some control over your asset allocation, it is up to you to make sure the investments are more conservative so your child's fund isn't affected by a sudden change in the market.

While your child prepares her college applications, start preparing for the FAFSA. Even if you think your family won't get financial aid, you must fill out the FAFSA, or you might miss out on good loan rates and grants. Gather up your paperwork, make estimates based on last year's tax returns and plan to file right after January 1 of the year your child starts college. You can always update your application after you receive your tax forms, but, the earlier you apply for aid, the better.