The Sky-High Cost of College

Question of the week: As a new dad, I'm worried about paying for college for my baby daughter. It seems like tuition costs these days are astronomical. What should I be doing to get ready? —Sanji

Dear Sanji,

Your daughter should thank you for having such a long-term view about these things so early in her life. According to the College Board, today's average cost for tuition, room, board and books at a four-year private college is a cool $25,000 per year. For a four-year public school, it's a bit over $10,000. If you factor in inflation over the next 18 years until your daughter is ready for college, you could be looking at a total cost for four years of up to $300,000, depending on the kind of school she chooses.

Before you bite your fingernails completely off, you should know that there are things you can be doing to prepare for the bill for that bachelors degree in medieval studies. Here's some advice from parents in the Armchair Millionaire community who are successfully tackling sky-high college costs.

Save automatically. "We set up an automatic withdrawal each month from our checking account into our tax-deferred college fund—a 529 plan. We find that this makes saving fairly painless and ensures that we don't put it off. My parents also make annual gifts to our children's college fund for their birthdays." —LimaLiz

Start young. "When our son was born, we did some calculations that really motivated us. We figured out that if we started saving $200 a month immediately, we'd have almost $95,000 by the time he was 18. If we waited until he was 10, we'd have had to put away $700 a month just to get that same amount." —Barbary Jaspers

In addition, the folks in Washington, DC have created programs that make it easier to save by easing your tax burden. And each of these programs got a bit better with the recent changes in the tax law. Here's a rundown on your college savings options.

The Armchair Millionaire Summary of College Savings Programs

• Roth IRA. If you're funding a 401(k) or other plan for your retirement, a Roth IRA may be a good place for your college stash. As long as your distributions are used for qualified college expenses, the earnings in your account will grow tax-deferred. Starting this year, you can contribute up to $3,000 in your Roth IRA (if you fall under certain income limits), and that amount will increase over the next several years.
• State college savings plans. These are incredibly flexible plans with no income restrictions and very high contribution limits (over $200,000 per student in some states). You can contribute to any state's plan, regardless of where you live, and use the money to pay for any college. And beginning this year, withdrawals from these plans are exempt from federal tax. Many states offer a break on state income taxes, as well.
• Education IRA. Money in these accounts grows completely tax-free, as long as you use it to pay for college. You can now contribute up to $2,000 a year per child to an education IRA, up from a paltry $500. Anyone, like grandparents or that favorite uncle, can contribute on behalf of the child as long as they meet certain income limits.

The Bottom Line: You don't need a Ph.D. in Finance to send your kids to college. Start saving when they're young and take advantage of tax-favored savings programs. Investing in your child's future may be the smartest thing you ever do.