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Confused Over How To Save For College? Here Are Answers

Many American parents face a tug of war over trying to save enough for retirement and saving for college.

Some, like Lisa Carey, a 44-year-old high school history teacher in Tampa, Fla., and her husband, Peter, a minister, haven't yet started saving for their three kids' college education. (Carey joined NPR's Your Money and Your Life Facebook group. If you're on Facebook, you can join the group, too.)

"I find it a struggle to save really much at all. I think we're doing decently well with retirement because I have a 403(b) through the school, and I'm good about contributing the maximum that they will match but we haven't started saving for our kids' college education, which sounds terrible," she says.

But Carey is doing something right. If your employer offers to match money you put into your retirement plan, do that above all else.

"You should always contribute up to your match because that's free money," says Scott Weingold, a financial adviser who specializes in planning for college. Basically this is one of the best investments you could ever possibly make. You put thousands of dollars into your retirement account and immediately earn a 100 percent return on that investment because it's a match. So it's like burning free money not to take advantage of that.

But beyond that, are you better off putting everything you can afford into retirement savings or should a chunk of that money go into a 529 college savings plan? People wonder whether having money set aside for college hurts the family's chance for financial aid.

"Oftentimes you hear conventional wisdom that you should save only for retirement and not save for college," says Mark Kantrowitz, who writes books on how to pay for college. But he says for the vast majority of people, it's good to save in a 529 plan.

"You will end up with more money for retirement if you save for college in addition to saving for retirement instead of just saving just for retirement," Kantrowitz says.

That's because unless you are very wealthy, if you don't set aside money for college you or your kids will have to borrow more money. And the interest on that can get expensive — or you'll have to pull money out of retirement savings, which is also costly.

And many people don't understand this key point: Saving money in a 529 plan does mean colleges expect you to pay more for tuition -- but not very much more.

"You're better off saving the money," says Sandy Baum, a higher education economist with George Washington University. She says when it comes to the amount a college expects a family to pay for tuition, the parents' income level counts up to eight times more than an asset like the money in a college savings plan.

"If you save the money, even if it's considered as an asset, the amount that it would reduce your aid is minimal compared to the benefit you'll get from having saved that money," Baum says.

At the end of the day, many parents will have to use a mix of resources: a 529 plan, some home equity, some student loans. But the takeaway is it's a good idea to sock away a bunch of money in a 529 plan.

Plus, if you have a 529 plan, you might get grandparents to chip in with extra money. There are websites to use with kids' birthday parties so instead of getting plastic toys and junk, guests can make contributions to a college fund.

Two quick pitfalls to avoid: Make sure you put the 529 in the parents' name, not in the grandparents' name. The latter can hurt you in a significant way on financial aid eligibility in the following year. And watch out for big fees that gobble up your returns in a 529 or any kind of investment account.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.