Meanwhile, now is the time to start looking for college scholarships. You might think that's crazy, but a few are available for children as young as 6. Among them: Kohl's Kids Who Care and Doodle 4 Google, an art competition that provides $15,000. Find more at tinyurl.com/finaid13.
Starting high school
Parents often don't start thinking about college until their children are seniors in high school, and college acceptances start arriving with horrific costs in them. That's tragic.
By senior year in high school, they have missed the greatest opportunities for winning scholarships and adjusting household finances so families are in the best position to maximize the financial aid colleges will give them. It's critical to get ready to seek scholarships before your child's sophomore year in high school because many deadlines arrive during the fall of that year.
If your baby had no interest in a bat and ball, you don't have to worry. Your search for scholarships will reveal that there's something for everyone who's willing to work at it — from tall children to left-handed people, bowlers and golf caddies, and David Letterman's award for average students. Find the most unusual scholarships at Unusual Aid and the most prestigious and high-paying like Intel's $100,000 at Prestigious Aid.
Along with your scholarship search, start having your child record all activities and honors. Scholarship applications and college applications require a list of activities and references from people who saw your child excel.
Read "Secrets to Winning Scholarships" by Mark Kantrowitz and "How to Go to College Almost for Free" by Benjamin Kaplan for strategies on winning scholarships. The same strategies will also help your child write winning college application essays, and scholarships help gain admission to college.
Meanwhile, check the 529 college savings plan now to make sure investments are becoming more conservative. The last thing you want is a big loss from stocks when your child is getting close to college. According to a 2011 study by Morningstar, the average 529 plan kept only 33 percent of assets invested in stocks for a 14-year-old, and only 11 percent for an 18-year-old.
Finally, if your child's high school offers advanced placement classes and tests, you might be able to have your child master them. Eliminating a semester from college attendance would save you some money.
High school junior year
This is the most critical year if your family is going to be eligible for financial aid. At some private colleges, a family earning as much as $200,000 might get some aid. At public colleges, it gets unlikely with incomes around $90,000. To understand what's likely for you, do the "federal" calculation and the "institutional" calculation, or use the calculator on the site for the college your child adores. The institutional formula is for private schools, and moderate-income students can sometimes attend private schools for less than the school down the road because private colleges have more aid available.
If you think you will be eligible for aid, don't make the common mistakes that sabotage the possibility. The biggest mistake is keeping savings in a child's name rather than the parents', but others can include refinancing a home and saving the money for college, converting a regular IRA to a Roth, using tax strategies that appeal to your tax accountant and destroy financial aid, or selling stocks, bonds or mutual funds in your child's senior year or thereafter to pay for college.
All could result in losing grants — or free money that doesn't have to be repaid.
Before December of your child's junior year, sell investments that will pay for college. Also, go over every account in your name and your child's name to make sure the money is in the right place and won't sabotage your chances of getting grants.
Why? Because each year you want aid from a college, you will fill out what's called a FAFSA form and, at private colleges, maybe a PROFILE form too. Embedded in those forms is a quirky formula that says whether you will get aid. To make the determination, colleges will require you to submit the forms and your tax return. You want your accounts and your tax return to be in the best shape for aid, starting with the tax year that begins Jan. 1 of your child's junior year.
By that time, if you are likely to get grants, college financial aid consultants suggest you make sure college savings are in the parents' name, not the child's. They suggest that any UGMA or UTMA accounts be closed even before then. The money will be the child's but can be used by the family for items like computers, prom clothes or class trips — non-necessities. If the money is in a 529 plan kept in the parents' name, it will reduce financial aid somewhat, but not nearly as sharply as a UGMA or UTMA.
To understand the quirky formula, and make sure you aren't shooting yourself in the foot, read Chany's "Paying for College Without Going Broke." One key is that when colleges calculate what parents can use from savings, the college will assess the savings at just 5.65 percent. But a child's savings are assessed at 20 percent for public schools and 25 percent for private schools.
Imagine a student who would have received $2,500 in grants from a college based on the family's income alone. If there's $10,000 in college savings in the student's name in a UTMA account, the family could lose the full $2,500 in grants. But if instead the parents had kept $10,000 in their own names, they would have received $1,940 to $2,500 in grants. Given the quirky formula, and the same total in savings, the college assesses parents $560 a year for college at most, or 5.6 percent of savings, not the 25 percent that applies to student money.
The logic behind this is that students should pay for college with their savings. The problem is that parents usually do most of the spending for college, and most don't have nearly enough savings to pay what they must. So if families happened to do the saving in their child's name, parents will have to dig deeper to come up with the money for college.