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A reader who is concerned about the high cost of college writes:

“A bedrock objective is that my daughters do not graduate from college saddled with debt. They need to pitch in to an extent, but I do not want them to mortgage their future so they can get a degree. I am interested in figuring-out how to accomplish that goal without working until I am 80….”

Seeing one or more children through college is the “last hurdle” for many prospective retirees. Most of us in range to retire when kids are college age, have already learned how to live prudently, control expenses, and manage investments wisely. But college tuitions are so astronomical, and the college process so inscrutable, that many are unwilling to pull the plug on a steady job until kids are through, or at least in sight of, college graduation. That was certainly the case for me, and others I know. If you have children, then even if college isn’t exactly your “last” hurdle to retirement, it is surely one of the most significant later milestones you must pass.

College is an emotional decision. We tend to get misty-eyed recalling our own college experience, and then mix those emotions in with our natural desire to have the very best for our kids. But college options need to be evaluated with the same hard-nosed look at costs vs. benefits as other major financial decisions. These days, the cost of a college education can equal or exceed the cost of a new home. Think of the hoops the bank makes you jump through to qualify for a mortgage: you should apply that same scrutiny to colleges!

I’m going to begin by looking briefly at the issues surrounding college costs, then explore the various mechanisms available to save and pay for college. Lastly I’ll finish with my own personal experience: how our family ran the education gauntlet.

Assessing College Costs

For starters, the decision to go to college, while logical for most professionally-oriented kids, is no longer a slam dunk. According to a 2008 article on Inside Higher Ed, “College Isn’t Worth a Million Dollars,” the widely-used statistic that the average college graduate earns $1 million more over the course of a lifetime than a high school graduate, is flat wrong. Even the College Board has backed away from that number. One harsh critic of the higher education financing system puts the figure at less than $300,000. That’s a significant sum, but not one that justifies a “college at any expense” mentality.

According to FinAid.com, college costs increase at an annual rate of 5 to 8% — about twice the rate of inflation! (We’ve personally seen even worse: When my son was applying to a large state university in early 2009 the tuition posted on their web site was $18,665. On his most recent bursar bill, three years later, tuition and fees were running in excess of $28,000!)

Why has college education become ever more expensive? I’m not going to go spelunking in the associated social and economic phenomenon. But clearly one reason is that government has deemed higher education a worthy social goal and politicians have been vying with each other to create newer and more generous financial aid programs. So government money has flooded the college market. And too much cash chasing too few resources inevitably leads to higher prices.

Mission Critical: Marketing or Education?

Meanwhile, colleges have been studiously marketing themselves as worth the increased cost. School ad dollars have happily reinforced the conventional wisdom that a college education is the only ticket into the professional job market. According to a recent report from the Council for Advancement and Support of Education, and marketing firm Lipman Hearne, since 2001, marketing budgets at colleges and universities have increased between 60 and 100 percent. Marketing has become a “mission critical process in higher education.”

When I was a high school senior, I visited a single college, spent a few hours walking around the campus, and applied for an early decision. By contrast, my son visited and applied to a half-dozen schools (some of his schoolmates applied to twice that many). The college tours we did resembled country-club walkthroughs, with paid guides and multimedia presentations. We saw dorms that could pass as 4-star hotels, student centers with massage and dozens of brand name restaurants, study halls with espresso machines and designer furniture, and a Starbucks on nearly every campus.

The starkest divide in college tuition costs is between public and private schools. According to the College Board’s Trends in College Pricing for 2011-2012, the median public college student pays tuition and fees of $8,274 (this is an average of both in-state and out-of-state students), while the median private college student pays $29,492. So private schools are more than three times as expensive as public schools, on average. In most areas of life you’d demand significant value before paying triple, so don’t go numb on the college decision! Of course private schools do their best to distinguish their brand, and convince you they’re worth the cost, but my real life experience says that, for most majors, the school you go to for an undergraduate degree is of little consequence once you leave the college years behind.

Bottom line: ignore the herd instinct and find the best value in a college education for your child’s particular needs. Usually, the default choice will be a public college or university in your own state.

Saving and Paying for College

Once you’ve digested the costs of college, it’s time to identify the resources to pay for it. Here is a brief examination of college financing options, in my preferred order of use:

Dedicated savings accounts: these include 529 Plans, Coverdell accounts, and UGMA/UTMA (Uniform Gift to Minors Act/Uniform Transfer to Minors Act) custodial accounts. I won’t go into the details of each type of account here, but the most important differences tend to be in the restrictions placed on how money can be used. Details are available on the web at SavingForCollege.com and at sites of most major financial institutions. 529 Plans are the newest and most prominent college savings vehicle. Generally run at the state level, contributions are not deductible, but earnings grow tax deferred, and distributions for qualified education expenses are tax free.

Though dedicated college savings plans make sense for many people, there are downsides. In addition to the paperwork for yet another account, making more investment choices, and paying associated fees, there are penalties if the funds aren’t used for college after all. You need some level of certainty about how many kids will be attending college, and what the costs will be, before committing major funds to a college savings plan. And it’s pretty hard to achieve that level of certainty about anything involving children and the future! As the parent of a grown child, I can testify that those variables are unpredictable. Against the tax and savings benefits of a dedicated college savings plan, you must contrast the risk of locking your money away where it can’t be used for other beneficial purposes, without a penalty.

Another key question in saving for college is the time frame. If I were starting now to save for a young child or grandchild, where college is a decade or more away, and the benefits of tax deferral would have time to compound, I would seriously consider a 529 Plan for at least a portion of our savings. But for time frames of much less than a decade, I’d probably just combine the savings with other family investment accounts, so I could stay flexible with spending options.

Free assistance: Despite political hand-wringing about a lack of education options, government policies ensure that there is a tremendous amount of free financial aid available. You will find, after filling out the Free Application for Federal Student Aid (FAFSA), and applying for aid at a range of schools, that many are eager to offer a package of assistance, after you’ve met your government-defined Expected Family Contribution (EFC). In fact, there is so much aid available that it may have become a disincentive to saving for college. After all, why bother squirreling away dollars for college when the EFC formula essentially penalizes those savings? (Also note how home equity is not counted in the Federal Methodology — so those who live in supersized houses get bailed out by those who live more modestly.)

Scholarships: these are plentiful too, but so is the competition for them. Qualifying for some national merit-based scholarships is straightforward: the application is essentially built in to the standardized testing process at high schools. But your son or daughter must be a strong student to be in the running. Thousands of other scholarships are available (see fastweb.com), but to stand a chance most students will need to make dozens of applications, if not more. One student who successfully landed a scholarship at Stanford, applied for hundreds of scholarships to increase his odds of success. That kind of effort requires a level of organization and foresight that may be beyond most teenagers. Prepare to be highly involved in the application process, if you envision scholarships playing a significant role in financing college for your son or daughter.

Part-time work: The departure for college is a turning point when most kids can and should begin to take on some of the responsibility of providing for themselves. College demands a new level of commitment: to be successful, students need some skin in the game. If you’ve raised them to understand money early, this will be a natural transition. But parents who give their son or daughter a blank check, or continue to participate in their every life decision while at college, may extend their own feelings of being needed, but are doing their kids a great disservice by prolonging their dependency. That said, presenting new financial responsibilities to your student must be done with great consideration and care. Kids may naturally feel some fear and resentment at being told they are now (partially) responsible for making their own way in the world, and must contribute something to the cost of their college education. My advice: start the process early, in the 2nd or 3rd year of high school, and take it in very small steps.

Student loans: Borrowing for college — going into debt — is, in my view, the last resort. Student loan debt is already extending the serious American debt problem into the next generation, starting many of our young people off in a hole they may never escape. FinAid.com reports that two-thirds of undergraduates leave college with some student loan debt. The Institute for College Access & Success’ Project on Student Debt reports that graduates with loans averaged over $25,000 in debt in 2011.

Borrowing for college should involve the same sort of hard-nosed financial analysis as starting a business. College is routinely called an “investment,” but rarely analyzed like one. Will the return on the investment be greater than the costs? Does the recipient of the loan have a shot at paying it off in a reasonable time frame? A look at the numbers justifies significant borrowing in only a few cases. Certain degrees or fields (medicine and engineering, for example) have a reasonable potential of paying off substantial debt. Many fields, unfortunately, do not. Witness numerous sad stories in the national media about liberal arts majors with 5 or 6-digit debt, who are jobless, or waiting tables. With no realistic chances of paying off that debt load, they are likely to struggle for years, then leave taxpayers holding the bag on their government-insured loan.

Do your student a favor and counsel part-time work, part-time school, a different school, or a different major — rather than going into debt for a degree that won’t sell.

Our Story

Our college experience was far from typical, but I’ll offer an abbreviated version here for the lessons that might be learned. First, understand that we made the bulk of our early education savings decisions in the era before widespread 529 plans. We did maintain a UGMA/UTMA account for our son in his early years, which both we and other family members contributed to, and which could be used for his education or other benefit.

By the time he was nearing the end of elementary school we could see that the public schools in our area were not meeting his needs, so we enrolled him in private school where he stayed until graduating high school. His UGMA/UTMA account was consumed long before then, paying for the early years of that private education. But we continued to save aggressively, and managed his education savings as part of our overall family savings, to preserve flexibility.

With intelligence, hard work, and the benefits of smaller class sizes and more focused teachers at his private high school, our son became a National Merit Scholar and qualified for a significant (though not full) 4-year scholarship at a great public school in another state where he wanted to live.

The primary lesson learned from our experience is this: if your child has needs, it’s better to spend the money on them sooner, than later. If you feel a private school education is necessary, start it now — don’t wait for college. Because if your child has a great early education experience, he or she will be able create opportunities later on in life. But if your child fails to learn and prosper in the early years, college may be a moot point.