Millions of parents face the same financial challenge: how are we going to pay for our children's college tuition? Fortunately, there are more options than ever available to families who want to start saving for college. Here are two popular strategies to consider...



529 Plans:

A 529 account is an education savings plan - operated by a state or an educational institution - designed to help you set aside funds for future college costs. The 529 account is popular because of the federal tax benefits it provides you. 529s offer the advantage of growing your moneytax free as long as the funds are used for approved education-related expenses (tuition, fees, books, supplies, equipment, room and board). Every state has at least one of the following two types of 529 plans:

529 prepaid programs: With a prepaid program, you invest a specific amount that will prepay your child's in-state tuition. If the child opts to attend a private or out-of-state school, the value of the funds can be transferred. Educational institutions can offer a 529 prepaid plan but not a 529 savings plan. Not all states offer prepaid programs.

529 savings programs: With a 529 savings program, the full value of your account can be used at any accredited college or university in the country, as well as some foreign institutions.

"A 529 plan is frequently managed to be aggressive when a child is young," says John Weiss, Financial Consultant and Vice President of John T. Boyd Company. "It gradually becomes focused on capital preservation - cash and bonds - as the child approaches college age." Those are other benefits of 529s.

* Contributions may be as high as $300,000 (or more) per beneficiary.

* You, not the child, control the funds.

* There are generally no income limitations or age restrictions.

"The biggest advantages with a 529 account," says Weiss, "are the avoidance of taxes on gains, and the ability to change the beneficiary at any time. The biggest disadvantages are the limitations on the use of the funds and the taxation issues if used for non-education purposes."

Coverdell Education Savings Accounts (ESAs)

Formerly known as the Education IRA, an ESA allows you to make an annual contribution to a specially designated investment trust account for education expenses. ESAs cover the same qualified expenses as the 529sas well as elementary and secondary school expenses. Your account will grow free of federal income taxes, and withdrawals from the account will generally be tax-free as well, explains Weiss.

Other ESA To-Knows:

* There are tax savings regardless of what tax bracket your child is in. And if you live in a state with income taxes, you may have even greater tax savings.

* The contribution limit is $2,000 per year, which includes accounts established by different family members for the same child. If total contributions exceed $2,000 in a year, a penalty will be owed.

* You will need to meet certain requirements in the years you wish to make the contributions as well as in the years you take withdrawals; for example, tax law prohibits ESA funding once the beneficiary reaches age 18. Furthermore, if the account is not fully withdrawn by the time the beneficiary reaches age 30, it will be subject to tax and penalties.

* You have less control of the funds. Money in the account will eventually be distributed to the child if not used for college.

The biggest advantages to the ESA are the tax avoidance and the ability to use the funds for K-12 education expenses, says Weiss.

Which Option Is Right For Your Family?

"There is no correct option," advises Weiss. "Each option has different investment and tax consequences, and the advantages and disadvantages of any option - or combination of options - will vary by family. Other important factors include income, expenses, assets, number of children, state where you reside, and probably college selections."

When Should You Start Saving for College?

"It's like the old adage: the best time to plant a tree is 20 years ago; the second best time to plant a tree is today," says Weiss. "The earlier you start to save, the greater the opportunity for asset value to appreciate over time." In a perfect world, savings should commence when you begin full-time employment upon graduation from high school or college, and continue thereafter. Young parents with infant children often face overwhelming financial pressures from the loss of an income - usually the mother's - combined with the added cost of a child. Nevertheless, the best time to start saving for college is the day your child is born.

If you have waited "too long," it still doesn't hurt to save. You should resist the temptation, however, to pursue investment strategies that are excessively risky and could substantially compromise asset value. Many find it advantageous to contribute monthly to an investment vehicle, and adjust the amounts upward with each raise or bonus.

"The growth in education costs, including tuition and living expenses, has been faster than overall inflation rates," says Weiss. "Most people underestimate the cost of college. It is far easier to cover college costs by saving earlier rather than 'making it up at the end.'"

To see how positive or dire your personal situation may be, you can find college cost calendars and calculators that will help you make a plan.

Bottom Line...

New investment programs bring new opportunities, despite making decisions more confusing. But with the proper planning, research, and some guidance from a professional, you can make saving for college within your reach.

Do you plan on financing college for your child?