Why You Shouldn't Put College Fund Money in Your Child's Name

Saving up for your child's education is a great way to prepare for the future. No one can know where they'll be financially in five, ten or eighteen years, so saving up now might save you some headaches when the time comes for your little one to fly the coop. But should you put college fund money in your child's name, or should you find another way to stow your cash?

The answer is B, find another way. If you put college fund money in your child's name, you could be hurting his chances of securing financial aid when he applies to colleges and universities. Unfortunately, colleges consider all money available for a student's education, and will offer a loan amount that is offset by those available funds.

Many parents slip up and open a savings account in their child's name, hoping to not only save for the future, but also help their child learn financial responsibility. At a very young age, children can learn how to balance their accounts and manage available funds, as well as the value of saving for a rainy day. This is a great parenting technique, but you probably shouldn't put college fund money in your child's name.

A better idea is to open a separate savings or checking account for your child to use on a regular basis. Money he or she earns from chores or jobs outside the home can be deposited there, which will help teach the value of a dollar. You should open up a second college fund, however, that is designed to help you save for college without ruining your child's chances of obtaining financial aid.

This doesn't mean, however, that you can't save for your child's future. You don't have to put college fund money into a savings or checking account, and those are actually the worst ways to earn interest over a period of several years. There are far better options available that will accrue more interest and provide more financial security for you and your child.

Instead of putting college fund money in the bank account under his name, open a 529 college savings plan or a Coverdell Education Savings account. These accounts not only offer you a safe place to put away money for your child's college fund, but they also offer tax benefits and serious interest accrual. The major drawback to this system of saving is that there are tax penalties for withdrawal if you aren't using the money for educational purposes.

Investments in savings bonds can also help you save college fund money without risking future financial benefits. Although bonds are taxable once you cash them in, they earn quite a bit of interest over long periods of time, and you can buy them to reach maturity when your child turns eighteen. Unfortunately, however, savings bonds are currently at a low point in the market, with about 3.4% average interest. You might want to wait on this until it goes back up.

The most important thing is that you save something for your child's education without jeopardizing future avenues of funding.

And don't forget that, when your child reaches his or her senior year of high school scholarships might be available. There are dozens of ways to make money for a college education if you spend the time researching it, and you don't have to worry about those options affecting future financial aid.