A cheat sheet for saving on college costs

My parents seemed surprised that in September 1986, my first day of New York University had arrived; nobody had saved even a token amount for college. There was some scrapping and scraping; what wasn't covered by grants and scholarships I got in loans at reasonable interest rates, and I even looked forward to the monthly ritual of carefully tearing out a paper coupon from a book, writing a check and counting how many more pages until I was debt-free in my mid-20s.

Today, the college finance landscape is like one of those video games where there is peril at every turn in the form of murderous interest rates and a precipitous middle area where folks are too poor to pay full price but too rich for aid. Tuition prices seem like they added on extra zeroes just for fun. Everybody needs some cheat codes to optimize their education dollars — especially if cost is the make-or-break factor in going to school.

College is one of the biggest investments we can make in time, energy and money — and saving for it can help soften the blow. The most common mistake people make, including my family, is waiting too long. "Starting early, even with small contributions, can make a big difference in the amount accumulated by the time college rolls around," says Sonia Lewis, "The Student Loan Doctor," who helps people navigate their educational debt.

Lewis notes the other challenges people face: underestimating costs and not considering room and board, books, fees and other expenses; not having an emergency savings account; and disregarding loans, grants and other ways to pay for college.

Where to start

Every student and their family should fill out the FAFSA form — even if you think you make too much to qualify for aid. "You don't know what you're going to be eligible for," says Lynette Khalfani-Cox, aka "The Money Coach," a finance writer and expert on college savings. “Even though the rollout was a hot mess,” the FAFSA's simpler format and SAI (student aid index) has changed how financial need is calculated, allowing millions more families to be eligible for aid, she adds.

Planning your 529

One common savings vehicle favored by both Khalfani-Cox and Lewis is the 529 investment plan, which offers tax-deductible withdrawals for qualified educational expenses. It's also portable, meaning that if it turns out your kid is, say, a coding genius and will skip school and go straight to work, you can use those funds for a different family member — or even yourself.

"Many states offer additional incentives, such as matching contributions or tax credits," Lewis says. If you use the money for something other than education, you will face a tax penalty. You can also lose money in a 529, as in any other retirement account, and this can be mitigated by starting early to optimize compounding interest, calculating risk tolerance according to the child's age and working with a knowledgeable advisor who can help you through volatile times.

Perhaps your child has a custodial account to which birthday checks or allowance goes. Know that these are among the most disadvantageous places to put college savings because they weigh more in the need formula. So, if there's $5,000 in the child's savings account, that would account for 20% of assets. That same amount in a 529 account would only be assessed at 5.6%, Khalfani-Cox explains. Retirement accounts are not counted in this formula, but be careful about raiding them to pay for college. You have fewer working years than your child does to recoup those costs.

Some people keep a ROTH IRA to pay for college. This makes sense because you can withdraw principal, tax-free at any time and use it for other purposes. Again, you should work with a financial planner to lessen risk, especially as you come closer to paying that first tuition bill.

4 ways to get a free or less expensive education

The best way to save money on college is to not spend it at all. Khalfani-Cox advises families to start looking for free money and opportunities before taking out loans. Here are some avenues she suggests exploring:

• Be free: Some prestigious institutions don't charge a dime for tuition, such as Cooper Union in New York and the Curtis Institute for Music in Philadelphia. If your family income is low enough to qualify, most of the Ivy Leagues offer a free ride for accepted students. The military branches don't charge for valuable training, and many community colleges are a fraction of the cost (if not free), as are some colleges overseas. If you're working for an employer who will pay all or part of your education, or if you're in a public service job with tuition reimbursement, this might be an excellent way to avoid those costs.
• Do the two-step: Many students start their college careers at a community or online college, then transfer credits and finish at a four-year college.
• Collapse time: AP classes in high school earn college credit, and if you can complete your degree in three years, you'll save on an entire year's room and board and other fees. Some colleges also offer discounts for summer classes and special three-year programs.
• Rack up scholarships: Nearly every corporation offers scholarships, especially for families of employees. The College Board has a comprehensive list. The key here is to plan early and understand qualifications and deadlines.

When you still need loans

We have seen the havoc wreaked when people don't understand their repayment terms and pay their loan amount several times over in interest. Loan forgiveness is currently a wobbly political subject. "I don't think that you should take out any loans with the anticipation or the expectation that it will absolutely be forgiven," Khalfani-Cox says. Be realistic about what your terms are — and make sure you understand conditions for repayment, deferment and forgiveness.

Finally, it's important to think about the return on your investment. "Borrowing determination should equal career compensation," Lewis says. "A wise college investment is to only borrow what the field you're pursuing is estimated to pay you in return."