Whether your little Ivy Leaguers-to-be are still in diapers or strapping teenagers, you've probably already figured out that it's going to be expensive to send them to college.
Luckily, there's a world of financial aid available in the form of loans, scholarships, grants, and work-study programs to help ease the load. When you fill out the application for federal student aid, you'll be required to spill your financial guts -- but that doesn't necessarily mean that every penny you've accumulated will have to pay for the ever-escalating costs of tuition, room and board, and books.
When planning for college and considering the possibility of financial aid, it helps to know how your assets will be counted by the formulas that determine how much money you'll be expected to pay.
Home equity, for example, does not count toward the federal formula that computes financial aid. Some private schools, however, may request this information and factor it into their financial aid packages. You'll have to check with your school to see whether they'll be looking at your home equity in their equations.
Retirement accounts, however, generally do not count as assets considered available for education costs. This is great news for anyone who wants to retire, because few things have the potential to deplete a cushy retirement nest egg faster than four years of tuition at a private college.
For this reason, retirement should rank at the top of your savings goals. It doesn't make a lot of financial sense to short-change your retirement to ensure you can pay every penny of Junior's educational expenses.
If you do, you'll give up the tax advantages and the potential for long-term growth that come with many retirement savings accounts, like 401(k)s and IRAs. Because these assets aren't counted toward your family's expected financial contribution, you'll be missing an opportunity to maximize both your retirement nest egg and your financial aid eligibility.
You could also be setting yourself up for disaster down the road. You and your kids have many options when it comes to paying for college. There are grants, scholarships, loans, and work-study programs to help you fill the gap in your savings. There are state schools and community colleges that can be quite affordable. You can also investigate a world of private loans.
But when it comes to retirement, there are no scholarships. If you haven't saved enough money for retirement, you'll just have to keep working.
So, fatten up your retirement savings first. Then, look to other savings options. When applying for financial aid, money you have saved outside retirement accounts -- and especially any money in your child's name -- will be counted as an asset that could be spent on education.
Unless you have a lot of other compelling reasons to invest money in your children's names, and you know you will not qualify for any financial aid, keep your college savings in your name. Students are expected to contribute about 35% of their assets toward school costs, while the expected parental contribution hovers closer to 6%. This includes investments held in any regular taxable account, like a brokerage account.
Keep this in mind when considering how to save for your child's education. Money held as a Coverdell Educational Savings Account (or ESA) in most cases will be counted as the child's assets, and the federal formulas will assume a large portion of the account can be spent on college.
Section 529 College Savings Plans, however, typically name a parent or other family member as the account owner, even if the student is named the beneficiary. Less of the money in these accounts will be counted toward your expected contribution toward college costs. If you should be lucky enough to have more than one child in college at the same time, that will be factored into the equation as well.
For even more information on college savings, take a look at these articles:
Check out our College Savings Center for more help on how to make sure your children don't put you in the poorhouse when they head off to college. Also, you can get a copy of our Guide to Paying for School, written by Robert Brokamp, which will show you the way. Finally, Motley Fool Green Light can help you meet all your money goals, from paying for college to saving for retirement.