Smart Ways to Start Saving for College

These smart programs may help ease the financial pain of paying for your child's four-year degree.
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Saving for your child's education can seem confusing and complicated.

--When should you start saving?
--How should you do it?
--How do you save for your retirement and your child's education at the same time?

Jupiterimages/Getty ImagesJupiterimages/Getty ImagesThese are all vital questions to ask yourself as you begin to think about saving for Junior's college education.

For starters-take a breath. The first thing to remember is that your child will have many more options to help her pay for college than you'll have to help you retire. Between scholarships, financial aid, federal grants and loans, there's no reason to jeopardize your retirement savings to put her through school. In other words-you should never plan on taking money out of your retirement savings to pay for your kid's college education.

That being said, the sooner you can start saving, the better. Even putting aside $25 a month can make a big difference over the years, especially if you can start in your child's first or second year since your investment will have more time to accrue interest and returns. Some options even give you state tax breaks.

As a side note, some college saving plans advertise college savings through whole life insurance policies. This tends to be expensive, though, and isn't something we would recommend.

Check out the options below to see which version of saving would work best for you and your family.

Also See: Easy Ways to Save Money Every Day

The 529 College Savings Plan
The 529 plan is a state-run savings program that may provide state tax benefits to individuals saving for college costs. At least one type of 529 plan is available in all 50 states, however tax benefits and program types vary from state to state. Get the details about your state's plan here.

Because 529 plans are treated as an asset of the donor rather than the beneficiary, it won't impact your child's eligibility for financial aid in the future.

There are two types of 529 plans: savings and prepaid plans.

Travelif/Getty Images Travelif/Getty Images 529 College Savings Plans are investment accounts with a select number of mutual funds from which to choose. Keep in mind, the growth rate is dependent on the underlying fund's performance. The plans are managed by either the state's Treasury Department or outside investment companies hired by the state. Here are a few things to keep in mind:

-Most states provide asset allocation options based on the recipient's age, with investments becoming increasingly conservative as the student approaches college age.
-Some states also provide income tax deductions for all or a portion of the donor's contributions.
-The majority of states allow donors to save up to $300,000 per recipient, and rarely have income limitations or age restrictions.
-529 withdrawals can usually be spent on room and board, as well as books and computer costs.
-Withdrawals not spent on education-related expenses are subject to a 10 percent federal tax penalty.
-Donors can transfer any unused funds to other family members.

Prepaid plans let you prepay all or some of the costs of tuition at the current tuition rate. The draw of this is that, historically, tuition rates have grown far in excess of inflation, so the prepaid plan allows you to lock in the current rate. A few things to keep in mind about this type of plan:

-Be cautious in picking this plan, as you are picking an exact school that you'll be putting money toward. Unless you know which school your child will be attending (which, let's be honest, who does when they're babies!), this plan is probably not the right fit for you.
-Generally this is used to pay for tuition at public universities. The snag is that only about a quarter of states currently offer prepaid plans.
-Some prepaid plans are also available for private colleges through the Private Colleges 529 Plan. It's currently accepted at 270 private colleges, so make sure to check this list if you're thinking about starting a private college prepaid plan. You can use the savings at any of the participating colleges, and can start saving with as little as $25.

Also See: Money Management Tips and Finance Basics

Coverdell Education Savings Account
Although a Coverdell Account is not as popular a vehicle for college savings, it can be beneficial for people who have kids attending private secondary schools. Joey Celis/Getty Images Joey Celis/Getty Images

Unlike standard 529 plans, funds from this type of account can be used to cover education expenses in elementary school, high school, or college. It also expands the types of expenses that qualify to include items like uniforms, books or tuition. Unlike the 529, the CESA has a maximum contribution limit of $2,000 per year per child, the balance in the account must be dispersed or transferred to another family member by the time the recipient is 30 years old and there are some income limitations. Fortunately, like the 529, the funds are not considered to be the beneficiary's money, which means that they will not affect his or her eligibility for financial aid.

Also See: Getting More Financial Help for College

Click Here for More Programs to Help You Start Saving for College

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