Five Tips to Saving for College

Since it's back-to-school season, there's no better time to review a Money magazine article giving five tips to saving for college. Here's what money suggests:

1. Start early. For families who have the luxury of time, you may want to look into Coverdell Education Savings Account plans. In this savings vehicle, your money grows tax deferred. However, there is a $2,000 contribution limit annually and an annual maintenance fee. A Coverdell ESA may be part of the college savings solution but it's not the entire answer. You really do need to start early in order to reap any benefits from a Coverdell since $2,000 a year for even a decade won't mean much if your child is looking at a four year private college.

2. Consider 529s. State 529 college plans have been a popular investment vehicle for a lot of parents. But be wary. It's convoluted, it's expensive, it's unregulated and it may not even grow your savings. There are 92 separate state 529 plans, according to Morningstar. And some states like West Virginia, California and Nevada have up to five offerings. These plans vary wildly and can be very difficult to understand. Right now money grows tax deferred but that is set to expire in 2011. And the fees can be outrageous. Mark Kantrowitz of online financial aid site Finaid.com says that many time these fees benefit the broker more than the saver. "I've seen fees as high as 5 percent," he says.

If you do want to use 529 plans, you must do your homework. These plans differ from state to state. Check out www.savingforcollege.com to compare the rules and www.morningstar.com to track performance.

3. Prepay with caution. If you're certain your son or daughter is going to a state school, you may want to consider prepaid tuition. The more time you have before your child gets to college, the better. When you enter into a pre-paid plan offered by the state, you basically lock in tuition costs and offset inflation rates. For example, if a state school costs $10,000 and you buy $5,000 you already have half of tuition paid for, regardless of how much tuition rises. You may like that certainty, but many state programs charge more than current tuition rates when pricing in the contracts.

And be careful -- if your student winds up not going to a state school, you may lose money. In some states, such as Florida, you would get the initial money you put in, but you may have to pay additional cancellation fees, according to Tanabe. In other states you may only get a small refund of your money. 

4. Play it safe. If you're more conservative, consider Education Savings Bonds. This is a risk-free investment. And there are tax breaks for parents who meet income eligibility. For single taxpayers your adjusted gross income cannot exceed $74,850 to quality for the exemption. Since the money is held in the parent's name, the child isn't penalized when it comes to getting financial aid. And don't forget that you can also tap into your home equity or retirement savings too. Most colleges don't count these assets at all.

5. Get your rebate. We all know about frequent flier miles, but how about getting money for college by shopping at McDonald's or Staples? The rebates received from a loyalty program are not subject to income tax or sales tax. Upromise is one example of a free rebating program that helps families save money for college. Major companies where you can get rebates include America Online, Avis and Borders Books & Music. You can automatically have your Upromise balance invested in a section 529 plan or you can redeem the rebate for cash. For more information, go to www.upromise.com. Or call 1-800 upromise.

I'm working on two options right now -- fully funding Coverdells for both children (we started when the kids were three-years-old) and saving in a taxable investment account. Yes, the latter costs us a bit more, but gives us more control of the funds and more flexibility in case we ever have to use the funds for an emergency.

Comments

[Mark]

I joined UPromise in January 2002 just as my first child was born. I also got the UPromise credit card (from citibank). Since joining I've gotten over $1,200 in Upromise dollars invested in my child's 529 account - that's $1,200 in free money, literally. Additionally, you can sign up your friends/family and have them link to your account. I've gotten another $110 from family who have signed up. If you assume I'll continue to get about $300 per year through UPromise for the next 15 years (when my son goes to college), at a 6% return on my 529 plan, that ends up being over $10,000 in free money when he is a freshman. Perhaps that will only cover four years of books, but hey, every little bit helps.

Pitfalls - there are two. First, the Upromise credit card carries a steep interest rate. So if you don't pay off the balance each month, your UPromise dollars are really going to be eaten away by interest charges. Second, buy using UPromise you are essentially signing up to allow all of your purchases to be tracked - from gas to food to clothing and beyond. I haven't seen a negative impact of this yet, but you should know going in that free money comes at a price of having your purchasing preferences being tracked.

[Steve C]

I joined a similar site to UPromise this new year when my twins were born in March 2003. I started worrying about college savings after my co-worker started telling me how much its going to cost him to put his 2 kids through college(they are 14 and 16). He suggested UPromise and another one called Little Grad(www.littlegrad.com).

I signed up for both and I have to say the sign up process was much easier for Little Grad. As a frequent online shopper I am always worried about identity theft and since Little Grad is a relatively new company I was a little skeptical about giving out any important information. But their sign up doesn't ask for your SSN or your credit card number so I feel relatively safe with them.

So far, both UPromise and Little Grad have been really easy to use. Does anyone have any other suggestions?