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Rethinking College Savings and Expenses

College Savings

For many parents, college has become a conundrum. With annual tuition costs soaring, college savings funds sinking, institutions reducing grants and other aid, and the worst job market for graduates in decades, parents are rethinking both how to pay for college and how to get the most value for their investment.

A recent survey by the National Association of Colleges and Employers found only 20 percent of students who graduated this spring and applied for a job were employed when they left campus. That compares to 26 percent last year, and more than half of those who graduated in 2007.

Meanwhile, the value of college savings plans dropped 21 percent in 2008, while costs rose about 6 percent on average. Here are some thoughts on what to do for kids at every age on the college-going spectrum.

If your child is in pre-school or grammar school:

  • Start saving. Nine in 10 parents of children under 18 say it's likely their children will pursue higher education, but only four in ten are saving, according to national study from Sallie Mae and Gallup. The earlier you start the better: Parents with a two-year-old who want to save half the cost for an in-state, four-year public university should put $190 a month in a 529 college savings plan – just over $6 a day. If the money grows an average of 7 percent a year, and college costs rise 5 percent a year, you'll have more than $65,000 saved when it's time for college.
  • Can't save that much? Figure out what you can spare in your budget and use this college savings calculator to see how quickly it will add up. The state-sponsored 529 college plans allow your money to grow tax-free and withdrawn tax-free when used for qualified college expenses. Some states also offer an upfront tax break. Check out the best-rated plans at SavingForCollege.com, FinAid.com, 401kid.com or Morningstar.com.
  • If your child is in middle school:

    Check out volunteer opportunities with AmeriCorps. As of October 1, students from grade six through 12 can volunteer each summer and receive service education awards ranging from $500 to $750 for 100 hours of volunteer work. After high school, prospective college students can enroll for 10 months of full-time service (1,700 hours) and receive a grant of $5,350. See americorps.gov for more.

    *Note: This program has been legislatively authorized but at press time was awaiting Congressional funding.

    If your child is in high school:

    Consider a two-year community college -- an affordable way to earn required credit hours, while saving money on room and board. More than 11 million students were enrolled in the beginning of 2008, according to the American Association of Community Colleges.

    Keep in mind, there's typically no age requirement – your high school student could rack up college credit hours in the summers. Just make sure the credits transfer to the four-year college you're considering. (At press time, President Obama had proposed $12 billion in additional funding for community colleges, where nearly half of students receive some form of financial aid.)

    Still prefer a four-year institution? Go State! At in-state, four-year public institutions, tuition, room, and board averaged $14,333 in the 2008-2009 school year, according to the College Board. And the average full-time student at such an institution receives about $3,600 in grants and tax benefits, reducing the cost further.

    If your child is in college:

    Take advantage of new federal tax benefits for higher education. Families who have students in their first four years of undergraduate college education can claim a tax credit of $2,500 for each child under the American Opportunity Credit. The new credit basically replaces the existing Hope Credit for tax years 2009 and 2010 (raising it from $1,800), and makes the Hope Credit available to a broader range of taxpayers, including many with higher incomes, and those who owe no tax. (Credits offer a dollar-for-dollar offset on the amount a taxpayer owes.)

    The American Opportunity Credit also adds required course materials to the list of qualifying expenses, and allows the credit to be claimed for four years of college instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

    In addition, the Lifetime Learning Credit allows students to claim up to $2,000 in tuition costs on their tax returns, and income levels at which families can claim the credit have increased. Check out this IRS publication for more information on both tax credits and scholarships.

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