Money Basics

Saving for a child's education

Any parent who wants to send a child or children to college should start saving early. If you start when your child is a baby, he or she will have a nice college fund by the time high school graduation comes around.

How should you save? Consider your long-term investing options.

• Certificates of deposits (CDs) and money market accounts (mentioned earlier in this lesson).
  
  
• A 529 plan is an investment plan operated by each U.S. state. Federal tax law provides special tax benefits to you, the investor, under Section 529 of the Internal Revenue Code. There are two types of 529 plans: prepaid college tuition plans and college savings plans. They are open to anyone, regardless of income.
  
  
• No-load, growth mutual funds. A mutual fund is a pool of individual stocks—or several companies—that is managed by professionals. The idea is to grow your investment with no load, or fees, for you to pay. Depending on your state, the fund may be set up as a custodial account in your child's name under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).
  
  
• Educational IRAs (or Coverdell Education Savings Accounts). The contribution limit is $2,000 per year per child. However, this account can be a disadvantage when applying for federal financial aid because the account is considered an asset of the student, not the parent.
  
  

Before choosing any college savings options, conduct some research and consult with a financial advisor or tax expert to be sure it's the best plan for your financial situation. Also explore financial aid options.