Saving for College

Saving for College For many kids, college is the thing you do after high school; a chance at freedom and new experiences. For many parents, college is that thing you want your kids to go to, but have no idea how to pay for. According to a 2008 U.S. News article, college graduates earn approximately $20,000 more per year than those who just complete high school. According to FinAid.org, college tuition inflation on average is double general inflation...that's a scary thought. While scholarships, financial aid, and student loans are available, the facts are that most parents are going to need to have some sort a plan to provide some sort of funding for their kids higher education goals. So where do you start? Throwing money in a savings account is certainly better than doing nothing at all, but there are a few other vehicles you can use to more effectively save for college. In this brief article, I'll quickly highlight some of the more popular college savings vehicles and provide you with some great resources to answer your questions more fully.

529 Plans

The Pros

529 College Savings plans are by far the most popular way to put money aside for college. Each state has a sponsor for their 529 plan (the sponsor list can be found here ). In some states, your contributions are also deductible from your state income taxes (limits apply).

Your 529 account also grows tax deferred, meaning you don't pay taxes on the interest you earn during that year, leaving the money in the account to earn.

Perhaps the greatest feature of the 529 plan is that if you use the money in the account for qualified educational purchases, you can withdraw the money tax free!

The Cons

You must use the money in the account for college expenses, or you face paying taxes and penalties. So if you save for years in a 529 and Junior decides to join the circus instead, you may be stuck. While you do have the ability to change beneficiaries of the account, you still probably want to have a discussion with Junior about the purpose of this money.

Resources

529 Plans are an excellent way to begin the college saving process. While flexibility can be somewhat limited, they provide benefits for the future, as well as benefits for parents while they save.

There is a lot more involved with 529 plans than we have time to mention today, but some incredibly helpful resources are:

www.savingforcollege.com

www.finaid.org

UGMA/UTMA Accounts

The Pros

UGMA/UTMA (Uniform Gift/Transfer to Minors Act) accounts allow adults to place money, securities, or even property in the name of a minor until that minor reaches the age of majority. While what is in the account is still taxed, it is taxed at the minor's rate rather than the custodians, potentially reducing taxes owed.

The proceeds in this account can be used for anything, as long as it in the best interest of the minor. This flexibility is nice for parents who aren't sure if their kids will attend college, but want to still save for their future.

The Cons

The proceeds of this account legally belong to the minor. The custodian cannot tell the minor to use these funds for college. It's possible for a parent to save in this account for college over a long period of years, and then once the child reaches the age of majority, he/she can cash the account out and buy a car if they want to. The account automatically becomes property of the minor at the age of majority (18 in most states).

Resources

Prior to 529 plans, these accounts where the most tax efficient way to save for college. They can still be a viable plan, as long as the custodians' are aware of the risks. Some great resources to learn more about these plans are:

www.401kid.com

www.FinAid.org

Coverdell ESA

Coverdell Education Savings Accounts are very similar to 529 plans. Both accounts allow for tax-deferred growth and tax free withdrawals on monies used for higher education expenses. However, the Coverdell is subject to different limits than the 529. This article offers a great comparison of the two plans.

Summary

As you can see, there are a few different ways to save for college, each offering its own advantages and disadvantages. I think more important than the type of account you choose is that you at least do something. Even if you are only able to put away a few dollars a month in a savings account, when the time comes for your child to need it, it will be appreciated.