College savings: 5 things you’d better know now

March 03--Figuring out a way to pay for college is probably one of the biggest challenges families face these days.

With student debt skyrocketing, putting college grads in the financial hole just as they're starting their lives, how can they get a grip on the costs of college? By saving as early as possible, financial planners say.

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"A lot of people are in denial about what college is going to cost," said Jack Oujo, a certified financial planner and certified public accountant in Wall. "A good thing to do is go back to the school where they went and check out what the tuition and fees are because they will probably be very surprised."

According to a 2016 study by student loan company Sallie Mae, the average amount families paid for college in 2015-16 was $23,688, slightly less than a year earlier. Family savings, including money set aside by both parents and students, paid for 41 percent of college expenses. Scholarships, which will be the subject of an upcoming Press on Your Side column, covered another 34 percent, Sallie Mae states.

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So when should parents start saving? At or before the birth of your child, said Brian Boswell, vice president of research and development for SavingForCollege.com. "It's never too early or too late," he said.

Oujo suggested: "I opened up college funds for my children when they got a Social Security number." Press on Your Side talked with several experts about the big daddy of college savings plans, the 529 savings plan. Here are five things to keep in mind.

1. What is it? "It acts like a retirement account for education," said George J. Gotthold, a certified public accountant in Ship Bottom. One can be started with as little as $25. Parents can fund one. So can grandparents. The savings plans, operated by states, are managed by different investment firms such as Franklin Templeton or Vanguard. You can sign up for another state's plan.

2. Tax-free. You won't pay taxes on the account's growth or when the money is pulled out as long as it is used to pay for college costs, such as tuition, fees, room and board, books and supplies, even a computer. "The more time you allow your savings to grow, the more it has the opportunity to compound and the less exposed it is to short-term market downturns," Boswell said.

3. What about fees? Compare fees and administrative costs when you pick a 529 savings plan. And states can offer incentives for their residents. For instance, New Jersey's plan, called NJBEST, waives the annual $25 maintenance fee to New Jersey residents and offers a college scholarship of up to $1,500 to those who pick an in-state school.

4. Versatility. What happens if your child decides not to go to college? You can name another child as a beneficiary or use the money yourself to go back to college or even graduate school. If you don't use the money for college expenses, you'll end up paying taxes and a 10 percent penalty on the earnings when you withdraw the funds.

5. Prepaid plans. Another flavor of a 529, prepaid plans pay for future college expenses. But there's a big downside. Say you started a prepaid plan to go to a state university, but your child decided to go to a private college in a different state. Your prepaid plan may not cover the costs, said Greg McBride, senior vice president and chief financial analyst at Bankrate.com. Also, prepaid plans lock you into a payment schedule. "It can be a strain on the household budget particularly if you haven't started saving right away," McBride said. "If your kid is in middle school and you're just now starting to save, the payments on a prepaid plan can be a real budget buster."

Do you have a consumer problem that needs solving? Contact David P. Willis at 732-643-4042, [email protected] or facebook.com/dpwillis732.

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