Parents should ensure students are not using excess loans to go shopping and out with friends.

How Parents Can Stretch College Savings for Students Living at Home

Parents with kids living at home for the first two years of college could save more than $18,000.

Parents should ensure students are not using excess loans to go shopping and out with friends.

Parents should ensure students are not using excess loans to go shopping and out with friends.

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New York City mom Veronica Defonso carefully saved for her daughter's education, but she doesn't want to use up those funds before her child gets to graduate school. "Graduate school is absolutely necessary to get my daughter that much farther ahead," she says. 

To stretch out the savings in her 529 plan, a tax-advantaged college investment account, her daughter will live at home during her first two undergraduate years. The average cost for room and board in 2012-2013 is $9,341, according to data reported by 1,063 ranked schools in an annual U.S. News survey. By having his or her child live at home for two years, a parent could save more than $18,000, depending on the college selected. 

[Learn about families cutting costs to keep college in reach.] 

Parents with students choosing to live at home should follow these four tips to stretch their savings. 

1. Set educational goals together to limit excess spending: While their kids are still living at home, parents should have discussions with them about their career goals and the college credits needed to achieve those goals, Arkansas 529 Plan Project Coordinator Dale Ellis says. 

Saving money by living at home won't help family finances if there isn't a plan for students to graduate with degrees in a timely manner, he notes. 

Map out the full plan with students' high school counselors and solidify goals via career exploration options, such as shadow days or internships, he suggests. While students might change their minds, parents should make sure current goals are based on careful research. 

[Review your 529 plan annually to meet college savings goals.] 

2. Increase investment earnings for students planning to attend grad school: The longer parents wait to tap 529 plan funds, the more time they have to grow. "If parents have limited resources and feel grad school is a definite, keep the money invested or saved while paying for [college] expenses from the parents' regular paycheck or savings account for those first two years," says Jason Washo, a certified public accountant and personal financial specialist in Arizona. 

Hypothetically, this gives their 529 plans more time to grow tax free, provided funds are used for qualifying educational expenses. However, this only works if the students eventually attend graduate school, he notes. Otherwise, there may be tax penalties for withdrawing excess funds if the money isn't transferred to an eligible beneficiary

3. Use matching grant funds wisely: To avoid losing benefits, parents in states that offer 529 plan matching grants shouldn't wait to use those funds unless it's definite that their child will go to graduate school, Ellis says. 

For instance, an Arkansas couple may have earned up to $2,500 in matching contributions for their child, but saved those funds for graduate school. Instead, the couple spent their own funds or borrowed money to pay for college. After earning an undergraduate degree, the child decided not to continue schooling. Since matching grants are only payable to a university, the matching grants expired unused. 

[Should parents pay for their children's college education?] 

4. Watch kids' student loan borrowing habits: "Often, students living at home borrow more in student loans than needed to pay for educational expenses," Ellis says. Therefore, it's important for parents to help their kids budget for college expenses

For example, a student gets a $2,000 student loan refund check after tuition and fees are deducted. Textbooks cost $400; with $1,600 left, the student then buys music downloads and extra clothing, and goes out with friends. After four semesters, the student owes $6,400 that he or she didn't need to borrow. Interest may also accrue. 

Parents should talk to their kids about taking out fewer student loans, Ellis says. If students are swallowed by debt when they graduate, this ultimately defeats the purpose of parents saving for college. 

Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.