Hardly a day goes by without a news report alerting us to the sky-high costs of higher education. Parents lie awake at night, wondering how to pay their bills, save for retirement, and fund their child’s college education. A new study, “How America Saves For College,” identifies some recent trends of college funding.

The report, published by the nation’s largest student loan provider Sallie Mae, demonstrates that families are saving for retirement and/or college, but it also uncovers a troubling trend. One-third of the over 1,600 respondents indicate that they intended to use savings earmarked for retirement to pay for college. The other two-thirds say that they would consider using their retirement savings to fund college.

At first glance, this may not be troubling, but this approach has serious pitfalls. Paying for college with money withdrawn from a retirement account can result in unexpected problems. First, the withdrawal can count as income, which is taxable. Then add that additional income to your financial aid eligibility and you may find yourself priced out of additional aid. Additionally, you sacrifice the accruement of the retirement funds for your own retirement.

Mark Kantrowitz, a college scholarship expert, sums up this approach best, saying, “Between the tax impact and the reduction in aid eligibility, the family may net very little return on their investment.”

Instead of pulling money out of retirement funds, families should plan specifically on college savings, separate from their own retirement. The Sallie Mae study indicated that 70 percent of families with a set goal to save for college were confident they would save 10 percent of future college costs.

So, how do you approach this task? Boost your college savings fund with these tips:

1. Establish and add to a 529-college savings plan. A 529-college savings plan allows you to save money for college and then withdraw the funds for qualified college expenses, tax-free.

2. Set-up some manner of regular contributions, ideally using electronic fund transfers to ensure the money gets into the fund.

3. Reduce other expenses and increase the amount you save each year. Even a small increase in savings can make a big difference over the years.

You do not have to sacrifice your own retirement savings to plan for and fund for college. In the end, creating a balanced and regular approach helps everyone out.

Source: Today.com