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How To Avoid A Common Mistake When It Comes To Paying For Your Kid's College Tuition

MICHEL MARTIN, HOST:

Speaking of college tuition, it's September, and for many parents, that means you're another year closer to paying college tuition. There's a misconception out there that derails a lot of parents from saving for that daunting bill. But fear not - NPR's Chris Arnold from our Life Kit podcast is here to do some myth-busting with some college savings tips.

CHRIS ARNOLD, BYLINE: There's this idea or myth out there about financial aid that if you save a pile of money for your kid's college, the college is going to think, hey, great - you can pay a lot for college, and you don't need financial aid. And I have to admit, I fell victim to this when my kids were little, too. I figured, you know, I'm just going to be much better off putting all of my savings into my retirement account. The colleges don't look at that. And then I'll get a lot more financial aid because I don't have any money saved up. We'll take out some student loans, and I'll help my kids pay those off later. Great plan.

MICHELLE SINGLETARY: No. No. No. No. There's - you're going to owe. Your heart's going to hurt.

(LAUGHTER)

ARNOLD: That's Michelle Singletary. She's a personal finance author and a columnist for The Washington Post.

SINGLETARY: Now, a lot of parents do think that, like, the more I save, then that's going to be the less that my kid's going to get for financial aid. But guess what? They're going to look at your income.

ARNOLD: And this is the thing that you need to understand. When schools calculate how much aid you're eligible for - OK, bear with me here. It's like they put on magic glasses, and your income - it glows bright orange with these glasses. It counts a lot as far as how much financial aid you get. But the money that you've saved and set aside for your kids' college - the magic glasses can barely even see that money. Here's an example. We talked to Sandy Baum. She's an economist with the Urban Institute.

SANDY BAUM: So if you saved a thousand dollars, your expected contribution would go up by $56.

ARNOLD: Only $56 - there's actually a mathematical formula they use. Or let's say you save $20,000 for your kid's college. Your expected contribution would go up by about 1,100 bucks. In the grand scheme of things...

BAUM: You'd be so much better off than having to come up from nowhere with the $20,000.

ARNOLD: Yeah. And I think that once people understand that, it's, like, I get it. OK. You're so much better off having saved the money.

BAUM: Right.

SINGLETARY: OK, a few more quick things. Baum and Singletary recommend saving in what's called a 529 college savings investment account. You won't pay taxes on the gains in the account if you spend the money on college expenses if you do it that way. And Michelle Singletary says make that savings automatic - as in money gets auto-deposited without you having to do anything. She says there's plenty of research that shows that this is by far the most powerful way to save money.

SINGLETARY: So my husband and I set it up so that once a month at a certain date, money comes right out of our paycheck, goes right to the college fund. And that - I call it set it and forget it. That is the best way to save for your college fund, for retirement - anything that you're trying to save for.

ARNOLD: We've got tips on how to balance saving for retirement with saving for college and other things and how to find a 529 plan with low fees. That's really important. We've got a lot more information too in our Life Kit podcast episode on saving for college.

Chris Arnold, NPR News.

MARTIN: And you can get more tips on personal finance, health, parenting and more at npr.org/lifekit. Transcript provided by NPR, Copyright NPR.

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.