Saving for College

You and your husband may have already thought ahead about how to pay for your child's college education. If so, set some time aside to review that plan and determine if it's still realistic now that you're supporting your family on one income. If not, or if you and your husband never got that far in planning ahead for the future, don't let your anxiety mount. The good news is that there are options to help you easily begin saving and investing now for your child's college education.

State-Sponsored College Savings Plans
State-sponsored college savings plans, also known as 529 plans, are being touted as the King of College Savings Plans. Why? Well, they offer a strategic investment plan run by experienced professionals, and they allow you or any other donor, to deposit large sums of money tax-free in your child's account where the earnings grow tax-free to pay for college years down the road. Here's how it works: you deposit money in a state-sponsored account (either the state you live in or any other state). The account is overseen by either the state treasurer's office or a state-appointed program manager, usually an investment company. The program manager invests the funds in a variety of stocks, bonds, CDs and mutual funds. The younger your child is (the longer he/she has until he/she is college-bound), the more aggressive the investment plan (meaning the plan will typically invest more heavily in stocks or stock mutual funds, for example, than lower-risk investments like CDs or bonds).

The fund manager will move your money, over time, to gradually more conservative investments so that when it's time for your child to enter college, your money is invested in the lowest-risk, most liquid (meaning most quickly accessible) investments possible. This strategy is designed to give you the greatest return on your money by investing according to how long you have until you need to access your funds.

With recent tax law changes, all earnings on your investment are tax-free. Anyone can contribute to the plan. Each beneficiary (child that you have an account for) can receive up to $10,000 each year as a tax-free gift (beneficiaries must be U.S. citizens). The money can be used for almost any college-related expense and can be transferred to another sibling if your child doesn't attend school or if there is additional money left in the account after he/she graduates. As custodian of the account, you have complete control of the account.

Prepaid Tuition Plans
It sounds attractive. Locking in the cost of your child's college tuition while he/she's still in diapers defines a prepaid tuition plan. You choose a college- or a group of colleges (for example, all public colleges in your home state) and you stash money away in a fund to cover the cost of tuition when your child is ready to attend. Of course, depending on how young your child is it might be a bit difficult to figure out which school he/she will want to go to. If he/she chooses not to go to school, or chooses to go to a school other than the one you've selected, the amount you'll get back from the plan varies.

UGMA Accounts
UGMA stands for "Uniform Gifts to Minor Act." UGMA accounts and UTMA ("Uniform Transfers to Minor Act") accounts are also called custodial accounts. That means that until your child reaches age 18 (or 21 in some states), you are the custodian of the account and have full responsibility for how your money is invested and used. After your child reaches the legal age, however, the account becomes his/her property. The money can be used for college or for any other expense for the child while he/she is a minor. Once the account becomes their property, he/she is allowed to use it for any purpose. You cannot transfer the account to another sibling and the beneficiary must be a U.S. citizen. Each parent is allowed to deposit up to $10,000 in the account each year tax-free.

Coverdell Education Savings Accounts (formerly known as Education IRAs)
Coverdell ESAs won't allow you to sock away a tremendous amount of money for college costs, but they're a good place to park some savings. You, or anyone else (grandparents for example), can deposit up to $2,000 annually in this IRA. All interest earned on the money is tax-free as long as it’s used for your child's qualified college expenses. And with the recent tax law changes, you can now contribute to both a 529 plan and a Coverdell ESA within the same year. All beneficiaries must be U.S. citizens.

Series EE Bonds/Savings Bonds
These bonds issued by the federal government are another way to save for your child's college education. You can buy a bond for as little as $50, and you can even buy them online at Bureau of the Public Debt: Homepage. The interest rate on these bonds adjusts twice a year and they can be cashed in after six months of buying/receiving them.

For more information on financing a college education, check out the following links: