Create a plan for college costs

Like most parents, we want to help send our three young kids to college someday. But that big, fat number staring at me from my computer screen? Probably not going to happen. Nor can we count on income-based financial aid. So what are families like us to do?

First, estimate the cost. I tried college savings calculators available at dinkytown.net, savingforcollege.com and collegeboard.com, and while the answers weren't identical, they all were close. We need to save roughly $1,500 per month to amass the princely sum it will take to pay most, but not all, of the price tag to send our progeny to a school like the University of Minnesota. With college tuition increases consistently outpacing inflation, I guess I shouldn't be surprised.

Mark Kantrowitz, publisher of finaid.org, suggests the following formula: Parents with babies born in 2009 should save $220 per month if they want to pay for one-third of a public, four-year college and $417 per month for a private school.

Why one-third?

"Like any life-cycle expense, college costs should be spread out over time," he explained via e-mail. "I chose one-third savings because I figured one-third should come from past income (savings), one-third from current income and financial aid, and one-third from future income (loans). It also meshes well with college tuition inflation, which increased by a factor of about three over any 17-year period."

Maybe you can afford more. Does that mean you should pay more? It all depends on your values. Maybe you want to foot the entire bill because your parents did the same for you. Or maybe you want your child to shoulder some of the responsibility.

Laura Kuntz, a Bloomingon-based financial adviser with Raymond James, has designed a college savings strategy that requires her three kids to pay for a portion of their college costs and offers incentives for making wise financial choices. Her eldest is heading to college this fall and Kuntz has agreed to pay three-quarters of tuition, room and board up to $25,000 per year. Her daughter has to come up with the rest, plus spending money through a combination of her own savings and some loans.

Then to encourage her to apply for scholarships and consider the strength of financial aid packages when weighing her options, Kuntz told her that any money left in the account after she finishes her bachelor's degree can be used toward a graduate program. She ultimately selected a college that offered her a large scholarship.

Once you've figured out your college payment philosophy, look at your budget. How much can you realistically set aside? See any fat that can be trimmed? If not, are there ways to increase your income?

If you're like us, there's a sizable gap between what you'd like to pay and what you can afford to save. Don't be discouraged. Ameriprise financial adviser Ginger Ewing asks her clients who are currently paying for day care to consider shifting half of that money to college savings once the kids are in public school.

Delay retirement?

She also comforts families with information about tax credits that will help take a bite out of college costs. Then she reminds them of the expenses related to having a teen at home -- senior prom, hockey gear, food in the fridge and water in the washer.

Saving for college is a challenge close to Ewing's heart, by the way. The mother of three biological kids ages 6 and younger recently adopted three young siblings from Ukraine. "People save for what they really find is important," Ewing said, pointing out that many will add a $40 data plan to their cell phone without blinking an eye.

Kuntz tells her clients that deciding how much to pay for college is ultimately a retirement decision. "Any money that goes in that direction is not going to get saved for retirement," she explained. "That pushes out the retirement date."

Next week: Where to save for college and how to invest the money.