This article is from the Financial Aid, Scholarships, and Fellowships FAQ, by Mark Kantrowitz with numerous contributions by others.
Even though the federal methodology need analysis formula will
take parent assets into account when calculating the family
contribution, it is still worth saving money for college despite
the "savings penalty". Your home equity and retirement savings
aren't counted, and an age-dependent asset protection allowance
shelters some of your assets from the need analysis. Moreover,
parent assets are assessed at a very low percentage rate.
Try saving at least $100 a month from the date of birth. This
probably won't cover the full cost of the child's education, but
it can make a difference between being able to pay for college and
not. If you can afford it, $400 or more a month is a much better
When there are many years before matriculation, you can be more
aggressive in your investment strategy. As college approaches,
however, you should shift from risky investments like stocks to
more secure investments like CDs. Two years before college you
should sell the securities in order to avoid realizing the capital
gains during the tax year upon which need analysis is computed.
Education is one of the best financial investments you can make. A
bachelor's degree yields an increase in lifetime earning potential
of nearly half a million dollars according to Census Bureau data.
This is equivalent to a 20% annual return on investment.