Retirement & Financial Planning Report

Parents of young children may fear that saving for college will reduce the financial aid their children can receive. However, that’s no reason not to save. In truth, most so-called "financial aid" probably will come in the form of loans.

Whether a parent or the student is the borrower, loans are a burden that should be minimized or avoided. Counting the interest that eventually will be paid, a loan may turn out to be twice as expensive as simply spending the money from savings. Thus, parents and students should start saving for college as soon as possible.

Besides saving, preferably in tax-favored 529 plans, parents and students should apply for any scholarships that might be available. Many online sites such as Fastweb and Scholarships.com list scholarship opportunities. Over 10% of incoming college freshmen are on a scholarship, averaging nearly $3,000 per student.

Some financial aid is need-based, and the formulas for awarding that aid penalize student assets. That is, you’ll get more aid if you save for college in your own name, not in your child’s name. What’s more, money saved by a grandparent (say, a 529 opened by a grandparent on behalf of a student) won’t reduce financial aid at all.