Take From Your Savings

When you're deciding where your family share is going to come from, don't limit yourself to what's available from income. Expect to contribute a portion of your savings.

Parent Resources

If your family has assets that are readily available (e.g., savings or mutual funds), plan to use some of that money for college. The current formula that calculates the expected contribution by your parents uses a five percent spending rate as a guideline. We recommend this as a starting point, but your family is the best judge of whether you can spend more or less than five percent.

Your Resources

There's often money in your name, too. If you qualify for aid, 35 percent of that money will be expected to go to college expenses in the first year, 35 percent of what is left over the second year, and so forth through the four years.

The net effect of this formula is to expect that about 80 percent of student savings will go towards college expenses. Each year you should contribute the amount specified in your award letter.

If not receiving financial aid, you need to decide how to spend student savings. As a rough guideline, divide the total by five. Use one-fifth each year (assuming four years of education), and you will have one-fifth remaining when you graduate.

IRA Accounts

Traditional

If you've set up an IRA account, you're permitted to withdraw money for college expenses without paying the ten percent early withdrawal penalty. However, you will owe income taxes on the amount withdrawn.

Roth IRA

You may withdraw your contributions to a Roth IRA to pay for college expenses without having to pay either income tax or the ten percent early withdrawal penalty. Any investment earnings in your Roth IRA are also available for withdrawal without the ten percent penalty, but subject to regular income tax. Individuals may withdraw investment earnings tax-free if they're over 59 1/2 and have had their Roth IRA for at least five years.

Coverdell Education Savings Account

Qualified Tuition Programs, or 529 Plans

College Savings Plans

Use plan funds to pay for qualified education expenses. The beneficiary will not have to pay federal income taxes on plan earnings.

Prepaid Tuition Plans

Redeem the plan at an approved college. The beneficiary will not have to pay federal income tax on plan earnings.