Tips for Saving for College

Worried about saving the tens of thousands of dollars it takes to put a child through college? Here are a few suggestions on paying for higher education for both college-bound students and parents.

Always apply for financial aid

Sixty percent of undergraduate students receive some type of financial aid that covers 20 percent to 40 percent of the total cost. Therefore, it's critical to apply for financial aid regardless of your circumstances. Each and every year, fill out and submit the Free Application for Federal Student Aid (FAFSA). Go to fafsa.ed.gov for more information.

Know what counts

When an institution evaluates a student's financial aid eligibility, it first analyzes the student's "expected family contribution," or EFC, which is basically the amount the family is expected to pay. It's a good idea to understand how different assets count toward the EFC. Typically, EFC is 20 percent of a student's assets, 50 percent of a student's income, and 22 percent to 47 percent of the parents' income. Go to Savingforcollege.com/financial_aid_basics for more information.

Draw from retirement funds, but sparingly

When calculating a student's EFC, institutions exclude the value of 401k plans, individual retirement accounts, and insurance policies. Home equity is also typically left out, although some private universities are starting to include it. You can take penalty-free withdrawals from traditional and Roth IRAs to pay for education costs. But be careful: The withdrawal will count as income on the next year's financial aid application. It also depletes your retirement fund, which is not a great choice for parents.

Open a 529 account

These investment vehicles are a good way to save for college because earnings accrue tax-free, and tax-free withdrawals can made for qualified education expenses. This tax advantage was due to expire at the end of 2010, but has been made permanent through recent legislation. Many states are also improving their plans by reducing costs and expanding investment options.

A closer look at 529 plans

You don't have to invest in your state 529 plan. If there isn't a tax advantage to using your state plan, you might want to consider using another state's plan, especially if it offers better investment options with lower costs. Another factor to consider is the ownership of the 529 plan. If a student's parent owns the plan, only 6 percent of the value will count toward the EFC, which isn't bad. But if a grandparent owns the fund, none of it will count toward the EFC.

Put tax credits to work

Learn about education-related tax credits and deductions. These include the Hope Scholarship and Lifetime Learning credits, and deductions for tuition, fees, and student loan interest. If you qualify, these are great opportunities to reduce your tax bill if you're paying for your college education or that of a dependent. Go to IRS.gov for more information.

Grandpa can help -- and save

A grandparent, relative, or family friend can pay tuition costs — but not room, board, and fees — directly to an institution without incurring a gift tax. This may be a good approach for grandparents who have a secure retirement plan and are interested in reducing their estate tax liabilities.

Take the long view

Finally, treat college savings like retirement savings — start early so that earnings can compound. Begin an aggressive investment plan when a child is young, and shift to more conservative investments as the child approaches his or her college years.

Don't get discouraged

While college costs rise about 6 percent a year, the good news is that government grants, scholarships, and tax benefits can cut the bill by a third or more. This article is a repost of 10 Smart Tips for College Fund Savers http://www.boston.com/business/personalfinance/gallery/savingforcollege/ © 2014 Boston Globe Media Partners, LLC