By Kara McGuire

The best gift you can get for your child this holiday is not a Zhu Zhu pet. It’s a financial plan for college. College tuition has been rising faster than inflation for years. Add a recession on top of this scary fact and it’s even more baffling to see so many parents fretting about how to afford a sheepskin.

An annual survey by the College Savings Foundation found that a growing number of parents — 44 percent in 2009 compared to 31 percent in 2008 — are not very confident that they will reach their savings goals. A recent study by Fidelity Investments found that parents with high school kids can cover an average of 11 percent of the total cost of tuition.

I don’t mention these statistics to depress you. Rather, I look at them as motivation to start thinking about how you will help to pay for college.

Savings. You have until December 31 to make your 529 College Savings Plan contribution for the year. College 529 plans are tax-advantaged accounts that allow tax-free withdrawals for qualified college expenses such as tuition and books, laptops, and Internet access for school. There are no income limits or annual contribution limits in Minnesota for 529 plans and you invest your money in mutual funds as you would in your 401(k) or IRA.

If you don’t like the idea of having your money tied up in an account that must be used for education expenses, consider saving in a Roth IRA, which allows you to take contributions (but not earnings) out of the account penalty-free for any expenses, including college. A plain old savings account or taxable brokerage account will also do.

No matter where you decide to save, pay attention to the risk. Earlier this year, many parents of teens had too much of the college fund invested in stocks and watched these accounts take double-digit dives. Some experts question whether anyone planning to pay tuition in the next few years should have college money in stocks; bonds and cash are the safer bets.

Cash flow. If you’re like my family, we can’t afford to save enough to pay for private-school tuition for three children. College savings calculators say we’d need to save two times our monthly mortgage to pull that off. Instead of eating beans and rice every night to squirrel that much money away, we have made conscious lifestyle choices that should make it much easier for us to pay for some college costs out of monthly cash flow when the time comes. For example, we’re staying in our small three-bedroom home and refinancing into a 15-year mortgage instead of trading up for a larger home. If saving for college is unrealistic for your family, think about the lifestyle changes you can make so you can assist with tuition when the time comes.

Financial aid. Some parents are willing to borrow money to help pay for their child’s education using home equity or parent PLUS loans. Others would never consider it. Talk to your spouse about where you stand on this issue sooner rather than later.

And don’t leave your child in the dark. Your student needs to know whether you plan to help with tuition and how much he or she will be expected to pitch in. To avoid hard feelings and unmanageable debt, be sure to have these conversations long before the first semester begins.

Kara McGuire is the personal finance columnist for the Minneapolis Star Tribune and a St. Paul mother of three. Follow her on Twitter at Twitter.com/kablog.

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