Whether your college-bound child is in preschool or high school, you'll need a plan for paying the ever-rising cost of tuition and fees.
"Unfortunately, I believe a majority of [parents] procrastinate and don't do anything until it's right on top of them," said certified financial planner Tony Ristaino at Financial Planning & Management Center Inc. in Towson. "That's human nature, whether it's estate or retirement planning or an insurance plan. What they should do is be proactive."
That involves long-term planning, including taking into account your retirement picture. It also means not only saving money, but saving it in a way that will still allow you or your child to qualify for as much financial aid as possible.
For example, money in a 401(k) plan, Ristaino said, is not counted as an asset when federal financial aid officers are determining a parent's financial position. But if the money is in a mutual fund or savings account, it's fair game.
Raymond Loewe, author of "A Professional's Guide to College Planning" and president of College Money, a financial planning company in Marlton, N.J., said parents should sit down with their children and set a college budget.
"Instead of saying, 'OK, go where you want and we'll figure out how to pay for it,' they should figure out how much they can afford and set up guidelines," he said.
"The budget should be tied to a parent's ability to retire later. If they take out too much college debt, they will be paying off college loans after college instead of saving for retirement. And there's no loan money for retirement."
If the child wants to go to a school that costs more than the parents can afford, Loewe said, then he or she can pursue other revenue sources, such as the military reserves or a part-time job.
And with college tuition and fees rising faster than inflation, about 5 percent a year, it would take some doing to independently finance an education. If a year of college, including room and board, costs $10,000 today, it would cost $24,000 in 18 years.
That means parents of a newborn who want to start saving today for the baby's college education would need to squirrel away about $140 a month assuming an 8 percent annual rate of return, said Rob Williams, a certified financial planner at Baltimore-Washington Financial Advisors Inc. in Ellicott City.
Williams noted that if parents save money in a child's name, that nest egg will greatly reduce the amount of college aid for which the student will qualify. Financial aid formulas expect parents to pay 5.6 percent of their assessable assets toward their child's tuition. But the students are expected to pay 35 percent of their assets toward college.
Loewe advises against paying all the tuition up front even if you're able. Instead, he suggests taking out federal Stafford loans to help pay the bill.
"The repayment plans are so good today it's probably the best bargain in college," he said. Parents "can use the money for a better investment. By taking on student loans, they can leave more money in their retirement accounts."
But when it comes to saving, Loewe often recommends mutual funds.
"The reason for mutual funds, as opposed to a CD or putting it in the bank, is that college inflation has been running significantly higher than normal inflation for the past 30 years -- an 8 percent average over the past 20 years, although last year it was 5 percent -- and [with CDs or savings accounts] you're just barely keeping up with college inflation.
"It depends on how much risk you want to take and how old your kids are," he added. "You can take more risk when they are young and as they get older there are less risks you can take."
One alternative to typical investing is the Maryland Prepaid College Trust. Under the plan, you pay for state college tuition now and the state covers the bill when the child goes to college. (However, full tuition is not guaranteed and the state reserves the right to adjust the contract if the well runs dry.)
If the parents of a 5-year-old started in the plan today, they could pay $341 a month for 59 months, or $20,119. When it was time for school, the state would pay a total of about $50,000, if tuition continues to increase at its present rate. Parents can then deduct up to $2,500 a year from their income when figuring their state income taxes.
If a student goes to school out of state, the plan will kick in the same amount it would have had he or she gone to school in Maryland. Refunds are also available if the student decides not to go to college or if grants and scholarships cover part of the bill.
The plan makes sense "for somebody who is not financially savvy enough to be playing the markets, and for somebody who is not as disciplined as what that would require," said Doug Neilson, a spokesman for the trust.
"We have people in the programs with incomes far greater than yours and mine together who do it just for the peace of mind."
While the task of handling tuition can seem daunting, it's well worth it, said analyst Thomas Mortenson of Oskaloosa, Iowa, who publishes a newsletter called a Post-Secondary Education Opportunity.
"Some graduates are $20,000 or $30,000 in debt and, yes, that's awful," he said. "But if you look at the fact that they will be earning half a million dollars more over their lifetime, then I think the loan costs look pretty modest by comparison.
"The only thing more expensive than going to college," he said, "is not going to college."