What's the Best Way to Save for College?
My husband and I are expecting our first child in December, so we're thinking about how to save for college. Tuition at public colleges is up 5.6 percent a year above inflation for the last decade, according to the College Board; if that trend continues, sending our bundle of joy to out-of-state U is going to cost upwards of
The good news is that parents and grandparents have a lot of options to save for college. The three most important concerns for most families are picking a safe investment vehicle with decent returns, finding the best tax advantages, and avoiding being penalized for saving when it comes time to apply for financial aid at the college of your choice.
Here's a rundown of the options as I see them, from best to worst. Remember: Don't put away money for the kids' college without first paying down debt and saving for your own retirement.
529 College Savings Plans
Under Internal Revenue Code section 529, all 50 states and the
To limit fees and commissions, you want a direct-sold 529, rather than one sold through a broker. As always, you should also choose the lowest-cost investment options; two to look for are Vanguard index funds or the Fidelity Spartan 500 index funds.
Coverdell Education Savings Accounts
A Coverdell ESA has the same federal tax benefits as a 529, but it has an annual contribution limit of
Prepaid tuition plans
Another kind of 529 plan is a prepaid tuition plan. In 17 states, you can invest an amount equivalent to one semester of tuition in your state university system today, and the state guarantees that your investment will be worth one semester's tuition 18 years from now. It's a simple investment that provides peace of mind and a decent rate of return, as public university tuition has been rising about 6 percent a year. Prepaid tuition is also a hedge of sorts against economic downturns: Tuition tends to rise even more in years when the market is sinking. The obvious disadvantage to a prepaid tuition plan is that it locks your child into attending her state university. Some states honor other states' prepaid tuition plans, but you may have to pay the difference between an in-state and out-of-state student. There's also a risk that plan costs will rise, or that the state will not be able to honor its obligations.
UGMA and UTMA accounts
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Personal Finance - What's the Best Way to Save for College?
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