But all hope is not lost. Even parents with 1-2 years until their child ships off to college can still make a sizable dent in their future tuition bill. Here's a list of the best college savings tips that have proven themselves time and again for panicked parents.
Consider Prepaid Tuition Plans
One of the biggest frustrations for parents with little time to save is the pitiful returns earned on most short-term investments. In lower interest rate environments, it is not uncommon to see parents only earning 1-2% on nest eggs that they can’t afford to scramble by investing in the unpredictable stock market.
Many state and college prepaid tuition plans offer a great alternative to standard fixed-rate accounts, since these plans essentially grow your money at the rate that tuition rises. Since college tuition has historically inflated at a rate of 4-6% annually, this offers a very attractive alternative to the 1-2% some money market and CD accounts are paying. To sweeten the deal, some states even give parents a tax deduction or credit for contributing to these plans.
Ask for Section 529 Gifts
If there is anyone in your child’s life who likes to spoil them, consider asking them to contribute to your child’s college fund instead of the local toy store. By redirecting their generosity into an existing Section 529 account for your child, they’re giving a gift that truly keeps on giving. To encourage this, most states’ Section 529 plans are set up to allow people other than parents to contribute to an account opened and controlled by a parent.
Of course, giving to a child’s college fund can be as rewarding for the donor as it is for your child. Many of the states that permit tax deductions for funding a college account permit a person to take the deduction even if it is not their own child. Further, the IRS allows individuals to gift up to $13,000 per year to each donor (known as the “annual gift limit”), which is a great way for wealthy grandparents to slowly reduce their eventual estate tax burden.
Get Onboard with UPromise
When it comes to paying for college, there are few free lunches. Thankfully, UPromise offers a buffet of free financial help by rewarding parents and students when they shop at participating retailers.
Under the free program, major retailers deposit a portion of what you spend to a college account for your child. The service does not cost anything out of pocket or raise the price of your purchases. It is simply the businesses’ way of trying to entice you to choose them versus their competitors.
Sweetening the deal is the fact that you can send invitations from your UPromise account for friends and family to register their credit and debit cards as well. Then, every time they shop, your child receives additional contributions.
Re-evaluate Your Life Insurance
While a lot of life insurance agents would argue otherwise, cash value (whole life) insurance is generally a bad deal compared to term insurance. Many parents are spending thousands more than they need to on coverage that could be purchased at a much lower cost. If you own such a policy, consider talking to a fee-based Certified Financial Planner (prior to cancelling your policy), about whether or not this makes financial sense for your family. Doing so may free up substantial funds that can be re-directed into a college savings plan.
Whatever you do, unless you’re over age 59 1/2, don’t use a life insurance policy as a short-term savings vehicle for college. While some agents might try and tell you otherwise, these are very costly savings vehicles whose benefits don’t come close to matching other options such as Section 529 plans.
Get an Extra Two Years
More and more parents are ditching the notion that a four-year college is the best choice for a young adult. The “college experience,” while no doubt fun for many 18-19 year olds, often ends up being nothing more than an extension of the “high school experience,” minus the adult supervision.
Considering that the vast majority of classes taken in those first two years can also be taken at your local community college at a fraction of the cost, as well as the fact that your child is more likely to pass them sleeping in their own bed than on the kitchen table of a frat house, community college is worth a look. By having your child knock off their general education requirements at home, you’ll give yourself an extra two years to save, while possibly also saving their GPA.
As an added bonus, you can “encourage” them to get a part-time job and help contribute to the costs of their degree. Few things will encourage a student to take those final two years of college seriously like the realization that it’s their own money they’d be wasting.