Student Center

Plan to Save for College

With college expenses increasing each year, saving for college is more important than ever before. The earlier you are able to start saving, the less financially challenging it will be. The best savings plan for college, regardless of the age of your child or your financial status, is the 529 plan. While there are a number of options for the 529 plan, choosing the right one is important for your financial well being and your child's education.

There are two types of savings plans under this heading. The first is simply a savings plan, working much like an IRA or 401(K) in terms of investment options. This plan may be state affiliated, but can be used in different states or at different schools. The other choice is to prepay tuition. These pay part or all of in state tuition, but can be converted for use at an out of state or private school when the time comes. Finally, there are a few independent 529 plans affiliated with specific private colleges and universities.

Your financial advisor can help you choose the right plan for your investment portfolio, or you can select one on your own. Look for low fees and a good return, but do be aware that like other investment accounts, your return is dependent on the choices you make with your money. The state run plan in your state may offer state tax benefits, scholarships or financial aid benefits, and is often quite reasonable in terms of cost. Buying direct as opposed to via a broker will help you to save.

Choosing to save with a 529 plan will allow you some tax benefits on the federal level. Account earnings, including interest and gains are not taxed. Moreover, you can withdraw funds at any point for qualified educational expenses. The law allows for substantial sums to be invested in these savings accounts, and both parents and grandparents are able to contribute and manage these smart college savings accounts.

The other popular educational savings account is a Coverdell account; however, some of the tax and financial benefits of this are due to expire in 2010. The most notable advantage to the Coverdell is the ability to use funds for elementary and high school education expenses as opposed to just college and university costs, but this is currently due to expire as well. Coverdell accounts can be rolled into 529 accounts without incurring penalties of any sort.