Dear Joe, I'm only 15 years old, but after watching my parents put my sister through college, I realize they're going to need help. Since I don't have a college fund, how can I save or put away money strictly for college? -- Tori
It's wonderful (but, alas, not too common) that you are thinking ahead and looking to save for college. Many parents struggle to afford college for their children, and your folks will appreciate anything you do to help.
The most effective way to help your parents is to make colleges want you as their student. That means taking on a challenging high school curriculum, achieving high grades, scoring well on standardized tests, such as the SAT and ACT, and becoming a leader outside the classroom in one or more activities for which you demonstrate a passion.
Those activities can involve music, sports, volunteerism, politics, international travel and just about anything else that will make your college application stand out.
Most of the Ivy League schools have recently revised their aid policies and are spending more of their endowments to make college affordable for moderate-income families.
For example, if Harvard accepts you for admission, and your family income is below $180,000, your annual cost at that school will be capped at 10 percent of your family income. And Harvard is just one example.
Only a small percentage of students are able to gain admission to Ivy League and similarly endowed schools. But while less-selective colleges may not have the resources of a Harvard or Stanford, they are just as interested in attracting a diverse and high-quality group of students.
Many will offer generous grants or tuition discounts beyond the standard need-based financial aid package to students who demonstrate exceptional talents and academic prowess.
Here are some other things you can do that will help bring down the cost of college.
4 ways to bring down college costs:
•Consider a public school. Your in-state public university offers a great education at subsidized tuition prices. However, as discussed above, many private colleges will bring down their prices for the right applicants.
• Think about your goals. Start investigating the schools you are most interested in while carefully weighing academic and career goals. The wrong choice can be expensive if you later decide to transfer schools or drop out entirely.
• Enroll in advanced placement. Look into advanced placement classes at your high school. Many colleges accept AP for credits, which can reduce the time you spend in college. In some cases, you can substitute a year at a local community college for your senior year in high school.
• Research scholarships. Visit your high school counseling office or your public library. Or, search for free scholarship sites on the Internet. When the time comes to apply, you should have already developed a sound strategy for seeking out scholarship money.
With regard to saving money, my suggestion is that you open a Roth IRA and contribute as much as $5,000 per year with the unspent earnings from your job. The Roth IRA will not count against your federal financial-aid eligibility, although the school may count it in awarding institutional aid.
If you choose to do so, you can pull out your Roth IRA contributions at no tax cost to pay college expenses. However, I suggest you take loans for the first three years and wait until your senior year before tapping your Roth IRA. That way, the distributions will not have to be reported as income on your financial-aid application.
Remember that although the law allows you to tap your Roth IRA contributions to pay for college, you'll be even better off in the long run, leaving the money untouched so it can grow for your retirement. Only use these funds for college as a last resort.
The worst mistake would be for you to keep large amounts of money in a bank account or mutual fund. The funds will be counted heavily against you in determining your eligibility for financial aid, and the interest, dividends and capital gains from your taxable investments may become subject to the expensive "kiddie tax."
If you cannot open up a Roth IRA because you do not have job earnings, your next best options would be a 529 plan or a Coverdell education savings account. Learn more about the advantages of these vehicles at Savingforcollege.com.