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As your child gets older and closer to college, shift prior savings from stock investments to lower-risk savings bonds or CDs with a maturity concurrent with the time the bills are due. "Stay liquid," advises Lawrence Wiener, chairman of Pension Investors Corp. in Hollywood, Fla. "Don't expose yourself to unnecessary market risks; instead, emphasize accumulating as much money as possible, not on the return. The more risk you take, the more you'll suffer."
Try to keep your head during all this. "The money you're collecting is to contribute to your portion of the bills, which is the expected family contribution," or EFC, reminds Jacqueline King, director of federal-policy analysis for the American Council on Education. Don't alarm yourself by thinking you have to save the full amount of college tuition. On the other hand, don't fool yourself into thinking that if you neglect saving altogether, you'll qualify for more aid and thus be better off. "You'll only hurt yourself by not saving any money," warns King. "Believe me, it's not worth it to avoid saving to try to lower your EFC." That's because your EFC without any savings will be insignificantly lower than if you're somewhat prepared for the cost. You'll just end up saddling yourself or your child with extra debt to cover the EFC.
CRADLE TO COLLEGE
If you've just had a child, probably the last thing in the world you're worried about is college. But thinking about it eight to 18 years in advance puts you way ahead of the game. Even small amounts of money can grow enough to cover college costs. One way, of course, is to start stashing money into an account and watching it grow. Another is to take advantage of various prepayment programs that help you pay for tomorrow's education at today's prices (see box). Here's what the experts recommend for families in for the long haul:
Your best bet for earning high rates of return on your money over time is to invest in the stock market. Since you've got at least 10 years before you'll need the money, put it in growth-oriented investments that pay low or no dividends, like a stock mutual fund. Try stashing away a predetermined sum each month, say $100.
Avoid investing that money in income-generating and high-dividend stocks that could be taxed at a federal rate as high as 39%. Satovsky recommends stock mutual funds that are taxed at only the maximum capital-gains rate of 20%. Also remember that by keeping the money in your own name, you may net your child more financial aid when college finally rolls around. To calculate aid, colleges count 35% of the assets held in a child's name as being available to pay for her education and then reduce any aid they might give by that much. By contrast, only 5.64% of your savings are counted. That means if you saved $50,000 in your child's name, the college would count $17,500 of that; the same $50,000 in your name would result in a reduction in aid of only $2,820.
If, based on your assets now, it's unlikely that your child will get any financial aid, you should consider putting money into a Uniform Gifts for Minors Act account, which is in the child's name and offers more favorable tax rates. There is one drawback: "You lose control of the money," says Wiener of Pension Investors Corp. "At age 18, your child can use it for anything, even things you didn't intend the money for."