Editors' note: The editors of Fidelity Interactive Content Services (FICS) chose this article for its insights into the best ways to craft a college savings strategy.

In uncertain economic times, not only paying the tuition bill, but actually saving for college may be daunting. But with the cost of a college education for today’s high school seniors now estimated at $124,400¹  and continuing to rise 5.8% a year,²  being prepared is essential.

Despite the economy, many parents are still doing something. In our yearly college-savings survey,³  we found that 63% of those with children 18 and younger have started saving for college and are on track to cover an estimated 18% of their children’s future college expenses. And it’s even better if they have a 529 college savings plan. These parents are on track to cover 36% of future college expenses, according to our survey.

Even those who have started early and planned ahead aren’t expecting to save and invest enough to cover the entire cost of a college education. In our survey, 76% of parents said they plan to pay a portion of the costs and expect to turn to other sources such as personal loans, grants and scholarships, and having their children set aside some of their earnings for the remainder.

That said, the more you can save, the less you may have to come up with from other sources. That’s why we believe that all parents—whether they have two or 18 years until college—should try to start early, save regularly, save in the right place, and plan how to fill the gap between savings and costs.

Start saving as soon as you can

The longer you have until you need the money, the more of a chance it has to grow. Even small amounts invested regularly have the potential to accumulate over time. Based on the chart below, consider this: $300 monthly contribution could potentially grow to $153,122 after 20 years, assuming an average annual return of 7%. Even if you are getting a late start, the same $300 monthly contribution could potentially total $21,480 after just five years.

What if you cannot afford $300 a month? Even a $50 a month contribution has the potential to grow to $25,520 over 20 years.

Save regularly

As the chart above illustrates, regular monthly contributions can add up. By investing a regular amount each month, you'll be taking advantage of an investment strategy known as dollar cost averaging. This allows you to spread your purchases over time and lessens the risk of investing a large amount in a single investment at the wrong time. You'll buy more shares of an investment when its price is low and fewer shares when the price is high. While there is no guarantee that you'll have a gain when you sell, dollar cost averaging may help reduce investment risk and build investing discipline.⁴  Perhaps the most effective method to build a college fund is to make the process automatic. Most 529 plans allow you to set up monthly automatic contributions as low as $50.

Save in the right place

Many parents worry that any savings will hurt their chances of getting financial aid. In fact, the amount of money that parents have saved for college plays a relatively small role in financial aid calculations. The expected contribution for tuition from parental assets is roughly 3% to 5% of a family's net worth. On the other hand, assets held in the student's name can dramatically lower the amount of aid. According to the College Board, colleges assume that up to 20% of assets held in a student's name are fair game for college expenses. The theory is that parents have many other financial obligations besides paying for college, whereas a student's primary obligation is to complete his or her education.⁵

This leads to a logical conclusion: In most cases, if you’re going to save money for college, saving it in an account that’s considered the parent’s asset, not the child’s, makes the most sense. A 529 college savings plan is one such account. These accounts also have other benefits, such as federal tax-deferred earnings and federal income tax-free withdrawals for qualified higher education expenses.

Fill a gap

As we said earlier, many parents aren’t going to have enough saved to cover the full cost of college. There are options: A non-working spouse can return to work. Students can attend a less costly public university rather than a private one. They can also commute to school rather than live on campus, and be responsible for some of the costs. In our survey, high school seniors said they believe they should help pay for at least some college costs, as well as help control expenses.

Also, don’t rule out financial aid. Even if you think you earn too much, complete the financial aid application. Nationwide, nearly three out of four full-time undergraduates receive some form of financial aid, according to the College Board's annual report "Trends in Student Aid" (2008). The two largest sources of aid are federal loans, which compose 40% of the total, and grants from colleges and universities, which make up 21%. There are also federal and state grants, scholarships, loans, and work-study programs.

© 2009 Fidelity Investor's Publications

1. Based on a straight average of the increase in tuition and fees at public and private four-year colleges as reported in the College Board's report "Trends in College Pricing" (2008).

2. Fidelity calculation based on the "Trends in College Pricing" (2008), the College Board’s estimated total costs for an average four-year college (private and public) beginning school year 2009-10.

3. As part of the study, Fidelity conducted a survey of parents with college-bound children of all ages. Parents provided data on their current and projected household asset levels including college savings, use of an investment adviser, and general expectations and attitudes toward financing their children’s college expenses. Using Fidelity’s proprietary asset-liability modeling engine, the firm was able to calculate future college savings levels per household against anticipated college costs. The results provide insight into the financial challenges that lie ahead for many parents. Data for the Fidelity College Savings Indicator (number of children in household, time to matriculation, school type, current savings, and expected future contributions) are collected by Research Data Technology, an independent research firm, through a national online survey of more than 2,300 parents nationwide with children aged 18 and younger who are expected to attend college; with household incomes of $30,000 a year or more; and who are the financial decision makers in their household. A separate interview was conducted with 400 students planning to enter college in the fall of 2009. College costs are sourced from the College Board’s "Trends in College Pricing" (2008). Future assets per household are computed by Strategic Advisers, Inc. (a registered investment adviser and wholly owned subsidiary of FMR LLC). Within Fidelity’s asset-liability model, Monte Carlo simulations are used to estimate future assets at a 75% confidence level (i.e. the goal is satisfied 75% of the time.) The results of the Indicator may not be representative of all parents and students meeting the same criteria as those surveyed for this study.

4. Regular investing plans do not ensure a profit or protect against a loss in a declining market.

5. The College Board, 2007