The thought of sending your extraterrestrial teen-ager to college can be bittersweet.
On the one hand, you get the alien out of the house.
On the other, it could be the most expensive exorcism of your life.
This time of year, things can get particularly scary. Another school season is arriving, reminding you that your space creature is one year closer to college -- and you likely haven't been saving enough.
If your 13-year-old gets himself into a private university, you're looking at total college costs ofaround $146,356, according to
savingforcollege.com. And if you've saved nothing thus far, you'llneed to stash $1,258 away a month to meet that cost.
Fortunately, you still have some options. Just know that your retirement account is not one ofthem.
Remember, you can't take a loan out on your retirement, but your kids can always get loans forcollege, says Matt McGrath, senior vice president at the financial planning house of Evensky & Katz in CoralGables, Fla.
So don't dip into those accounts. And if you need to choose between saving for retirement oryour kid's college education, be sure to weigh Johnny's college keg parties against the refrigerator box you'd be living in when you're old.
Start Saving Something
Even if you only have a few years, start saving. Every little bit will help.
You should still consider opening a
529 college saving plan.
"Especially if you're in a higher tax bracket, it still makes sense to contribute to 529 plans,even if the student is approaching college age," says McGrath. "All the earnings on that money in the 529will be tax-free when used for qualified college expenses, compared to tax rates as high as 35% ifkept in personal accounts."
Just be sure to put the money in conservative investments. You clearly don't want to risk iton the next hot stock. Consider short- to intermediate-term bonds, suggests Rande Spiegelman, vice president of financial planning for the Schwab Center for Investment Research. If you need the money in a year or two, go for ultrashort bond funds.
Just don't open a custodial account, such as a Uniform Transfer to Minors Actaccount. That can hurt his or her financial aid chances. Theoretically, that account is in his name and is his for the taking when he reaches the age of majority in your state. But for financial aid purposes, the lower amount of assets in your child's name, the better.
And if you were planning to transfer your own assets to your kid to sell and save sometaxes, remember that the rules changed with the
May tax package.
As a refresher, under the old rules, if your child was age 13 or younger, any investment income he or she generated was taxed at your rate, hence, the kiddie tax. So in the past, many parents have gifted appreciated assets to their 14-year-olds, who would no longer be subject to the higher taxes and could thus help lower the tax bill.
But the new legislation raised the age on the kiddie tax. Now, anyone who's 17 oryounger pays tax at your rate. That means your high schoolers are no longer freebies.
Granted, you could transfer assets to your kid when he's a freshman in college as a way of getting the lower tax rate. Just make sure you monitor that money, or it may be blown on beer.
Find Free Money
Beyond saving, make sure to explore all the freebies, including grants and scholarships.
"Most students don't pay the sticker price for college," reminds Joe Hurley, the founder ofsavingforcollege.com.
So get that free money. Contact the university and request a list of the alumni grants. Checkyour local service organizations, like the Rotary Club and the Elks lodge. And then check the Web. Sites like
collegescholarships.com (one has a hyphen, one doesn't) list available scholarships.
Of course, you could just take out some loans and get financial aid. While they're far from free money, the federal government vehicles, like the Stafford and the Perkins, have really low interest rates -- around 7%. And they don't require credit checks or collateral.
Even better, if Junior takes out the loans in his name, hewon't have to start repaying the tab until he gets a job, and he'll get a tax break of up to $2,500on any interest he pays. Check
finaid.org for more info.
And you could always help your kid make the loan payments. Just know that, in theory, thosepayments are gifts to your kid, reminds Spiegelman. And you can only give $12,000 a year per person at this time to get a gift-tax exclusion.
Then don't forget about hitting up grandma and grandpa. And if they're feeling especially generous,they could pay the college directly, and then the payment won't cut into their annual gift-tax exclusion of $12,000 each. Tuition is a freebie when the check goes right to the school.
Grandma and grandpa, along with Aunt Milly and Cousin Joe, can also help with something else: Upromise. It's free money, and while it may not amount to much, again, every little bit helps, Hurley notes.
Here's how it works: Companies like
Bed Bath & Beyond
sign up with Upromise and will give you a percentage -- or rebate -- for every dollar you spend.
For instance, if you order $300 worth of sweaters from Eddie Bauer this winter, you'll get 3%, or $9, deposited into your Upromise account. It may not sound like much, but a percentage also will be added each time you buy products like Tide detergent, Huggies diapers (had I known!) and Fujifilm. Check
upromise.com for a complete list of participating companies.
All in all, try not to feel guilty that your little extraterrestrial may have a college bill to pay. You'll do what you can and, fingers crossed, he'll come out with a good job and be able to pay the loans himself.
Truthfully, you should be more worried about the fact that he'll be going to fraternity parties, eating pizza for breakfast and often forgetting to, uh, phone home.
Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;
to send her an email.