Saving for College

by John Nardini

With college expenses increasing each year, many parents wonder how they can pay for their child’s education without incurring a mountain of debt. Here are some ways to send your child to college without sending yourself to the poorhouse.

Start saving today. An old adage goes, “The best time to plant an oak tree was 20 years ago. The second best time is now.” With a large-cost item like college, it’s critical to begin saving as early as possible.
Invest in a 529 plan. These state-sponsored plans allow you to save for college by either prepaying tuition at a selected school at today’s rates, or by saving money in a tax-deferred account to pay for education at future rates. The idea is that your investment earnings grow to meet higher education costs in the future. Consult personal finance magazines or www.savingforcollege.com for information on the various plans.
Fund a Coverdell Education Savings Account. Families that qualify can contribute up to $2,000 a year to this IRA-like investment. Neither the contribution nor the interest is taxed when you make a withdrawal, as long the money is used for education expenses.
Consider taxable accounts. One drawback of Coverdell accounts and 529s is that if contributions aren’t used for qualified educational expenses, penalties must be paid. If you’re uncertain of your child’s education goals, consider a taxable investment account. You won’t get any tax benefits, but you won’t be penalized either.
Teach kids to save. As soon as your children begin earning money, set aside a portion for college. Open an investment account and, if you’re able, match their contributions. Encouraging children to save will produce more than cash for college; it might provide the lesson needed to complete it.

John Nardini is a frequent contributor to American Profile.

first appeared: 10/21/2007