Cramer: It’s All Academic: Saving for College in Tough Times

It’s time for a reality check.

In an economy where many Americans have lost a third or more of their savings from their 401(k)s, and probably as much in the value of their homes, the old ways of saving for college just don’t cut it right now.

Yet those stale ideas, which were fine in a bull market, are downright irresponsible when the economy is in the tank. I can’t believe the stuff I’m reading in the financial media about saving for college these days. One story said to build up emergency funds and increase your college savings. Another said to cut your meal costs.

Give me a break. If people had more money, they’d invest more money for their kids’ college education. And you don’t have to go hungry to save more for college.

You just have to be creative, aggressively go after free money and know where to look.

I’ve got some fresh ideas, so take your seats, Class of Cramer ’09, and let’s get started.

Look for freebies. I can hardly believe this, but a recent Gallup poll says that 25% of American families didn’t fill out the Free Application for Federal Student Aid (FAFSA). It’s easy, lots of families are eligible and you can complete an application online. But fill it out as soon as you can (Uncle Sam starts the ball rolling on January 1)—with the recession blowing at full steam, you could have some competition. 

The friends and family plan. Here’s a good tip: Instead of celebrating your child’s birthday with an iPod or another expensive, but increasingly redundant gadget, ask your family and friends to make a direct contribution to a good savings plan, like a College 529 plan. A lot of people don’t realize it, but parents aren’t the only people who can contribute directly to a 529 plan. Grandparents, cousins and family friends—anyone can pitch in. Many states are making it easier to do so by offering 529 gift coupons. One web site that does a really good job with third-party college funding is FreshmanFund.com. The site allows anyone to contribute to a 529 plan, no matter who administers it.

Start a Roth IRA. There is no minimum contribution limit to IRAs, so that, and the fact that you can withdraw from them tax-free for any reason, makes them a good college funding strategy in tough times. I like 529s, but if you take money out for any other reason than using the cash for college, it’s taxable.