By Pam Kramer; Illustration by Leigh Wells
Sometimes a parent's best intentions -- like wanting to help your kid go to the college of her dreams at any cost -- can lead to trouble in the future. Whatever you do, don't:Clear out your retirement funds.
There are numerous ways to pay for college but limited options when it comes to funding retirement. "If you reach 65, want to quit working but don't have enough cash set aside, there are no low-interest retirement loans or scholarships to help pay your bills," says Robert Brokamp, author of The Motley Fool's Guide to Paying for School (Motley Fool).Stash money in your child's name.
Saving is super, but setting up a college savings account with your child's name on it may actually reduce her aid opportunities. "In the federal financial aid formula, parent assets are assessed at no more than 5.64 percent, but a child's money is assessed at 20 percent," says Lynn O'Shaughnessy, author of The College Solution (Financial Times Press). Keep college savings in your name, or, better yet, save in a tax-deferred custodial 529 college savings plan or prepaid tuition plan. If money has been saved in your child's name and she's planning to enter college this fall or next, it's too late to move the money since aid calculations are based on the prior year. If she's a sophomore or younger, consider transferring her funds into your account or a custodial 529 plan, which will be regarded as a parental asset come July 2009.Assume you don't qualify for financial aid.
You might think you make too much money or have too many assets to be eligible for assistance and decide not to bother filling out the Free Application for Federal Student Aid, which can be a hassle. Still, file the FAFSA even if you think aid is a long shot because it's the gateway to all federal and most state- and college-based help, including federal loans. Schools take into account factors you might not realize, like having more than one child in college in the same academic year and the number of years until your retirement. Fill out the form.Buy into the idea that a high-cost education always leads to a better-paying job.
"Attending a top school is prestigious, sure, but it doesn't always translate into larger paychecks," says Brokamp. Fact is, a future teacher with an education degree from an Ivy League institution isn't guaranteed to earn more than one with a similar degree from a state U. If your child has her heart set on a pricey school, by all means let her apply -- because a good aid award could make it affordable. But also insist she apply to less-expensive schools, in case you end up having to cover costs and will need to rely on loans to do so.