Saving for College

Both students and parents can make the most out of the educational dollars they set aside by exploring the many savings tools available.
Since the cost of higher education is rising faster than the rate of inflation, traditional saving vehicles like CDs and savings bonds just can't foot the bill alone. Fortunately, options such as Coverdell Education Savings Accounts (CESA) and 529 Plans make planning, saving and paying for college easier.For Students
It is never too early, or too late, to begin saving for college. If you earn your own money from a part-time job, try to put some away before you decide how to spend it. Start out small with maybe 5%, and gradually increase the amount as your earnings allow. As your piggy bank grows, put your savings to work for you. Open a bank account that lets your hard-earned money grow but still offers easy access. Most banking institutions offer traditional savings accounts and certificates of deposit that pay interest.For Families
Saving money is the primary way to prepare for the costs of college. By setting aside a certain amount each month or payday, your family can build up a viable fund for college. For instance, investing just $100 a month for 18 years will yield $48,000, assuming an 8% average annual return. In addition, if parent and child begin saving early, the amount you have to set aside each month will be smaller.
Regardless of the amount you can afford to save each month, it is important to consider what savings or investments will minimize risk while maximizing the return on your money. Some of the most common investments are described below.Coverdell Education Savings Account (CESA)
Formerly called Education IRAs, the Coverdell Education Savings Account helps families save money for the education expenses of a child. One important difference between a CESA and other education savings plans is that funds can be used to pay for primary and secondary (K-12) education as well as higher education. This provision is set to expire in 2010 unless Congress passes a law to extend it.
The CESA allows you to make an annual non-tax-deductible contribution of $2,000 per child into an investment trust account. As the funds in the account grow, they are not subject to federal taxes. Additionally, withdrawals for qualified education expenses are also free from federal taxes (although they are usually not free from state taxes). Qualified expenses include tuition, books, and fees at an eligible educational institution.
Contributions must be made in cash before the child reaches age 18. Anyone can contribute, including grandparents, family, friends and even the student, as long as the income qualifies. To qualify for a full or partial contribution, the contributor's adjusted gross income must be less than $110,000 if single and $220,000 if married. Funds are controlled by the account owner at all times and can be used for education expenses of a sibling if the money is not used for the originally intended beneficiary.
To learn more about a Coverdell Savings Account, speak to a financial advisor.529 Savings Plans
Now, no matter what state you live in, there is a 529 program available for you to begin investing in. These state-sponsored plans help families set aside funds for future college costs. Commonly referred to as "Section 529" plans (after the Internal Revenue Code that authorized them) these come in the form of either prepaid tuition plans or savings plans.
The 529 prepaid tuition plan allows you to pay now at today's rates for school tomorrow. Your account is guaranteed to pay for tuition and fees at public universities and colleges in the state by the time your child graduates from high school. Room and board is not covered in a prepaid tuition plan. While you may use a prepaid tuition plan to pay for a private or out-of-state school, you may risk forfeiting some of your plan's value to do so.
The 529 savings plan, on the other hand, allows the full value of your account to be used at any accredited college or university. The 529 savings plan also covers all qualified higher education expenses, including room and board.
Each state determines its plan design, including what the maximum contribution per student per year will be. Investments in 529 plans grow tax-deferred until the child is in college, at which time they will be subject to the child's presumably low tax rate. Distributions to pay for the student's college costs are federal tax-free, and individual states may offer additional tax breaks as well.
To learn more about 529 Savings Plans, speak to a financial advisor.
Saving isn't the only way to pay for college. Federal, state and private grants and loans can bridge the gap between your savings and tuition, even if you think you make too much to qualify.
For more valuable information:
Learn more about the cost of higher education at What College Costs.
Explore the pros and cons of various funding options in Funding Options to Consider.
Discover loan options to meet everyone's situation in Loan Types Overview.
Use the Expected Family Contribution Calculator to determine the difference between the cost of your education and how much your family is expected to contribute