Sending your kids to college can be an expensive prospect. If you or your child is set on a private university, it will be even more expensive. It is important to begin preparing now for this future expense. Many parents plan to save for the amount a public school would cost and tell their children that they will need to make up the difference through scholarships and/or loans for the cost of the school. You have many savings options available to you.
1) One common account is the 529 account. This account is set up and managed by each individual state, so you would need to research the specifics for your own state. When you withdraw the money for higher education purpose, you are currently exempt from income tax charges. This law may change in 2010, because the exemption is set to expire then. Under the 529 account many states are offering prepayment plans. These allow you to pay the current tuition rates today, and your child will have college paid for when they attend. The rates lock in once you have finished paying towards the four years of college.
2) Another common account is the Coverdell Education Savings Account (ESA). This used to be known as an educational IRA. You are limited to contributing $2000.00 per individual per year to this account. This can be tricky if more than one person opens up an ESA for the same person. For example if both sets of grandparents open up separate ESA’s for the same grandchild, they can only contribute $2000.00 total between them.
3) You can also use traditional methods of savings for college. This would include a standard savings or money market account or a mutual funds account. Depending on the amount of time you have left before your child enters college you will want to choose a high yield interest account.
4) Savings bonds are another option. Series EE and Series I have tax benefits when used for higher education. However, I do not recommend using savings bonds because the rate of return is so low. It can take seventeen years for the bonds to reach maturity. Many people make the mistake of counting them at face value when they are not worth that much yet.