For contemporary parents, the main problem is that the cost of a college education is growing faster than the economy. When my kids are in college, for example, around 2029, analysts estimate public tuition will cost roughly $44,000 annually.
Here's the good news: "You have time on your side," says Chad Ernzen, senior vice-president of investments for the Mutual Fund Store in Westminster. As soon as you have a Social Security number for your child, you can start saving. Ernzen advises clients to "start with whatever amount is available, and increase as you go." A family that sets aside $50 a month starting when their child is born will accrue more than $21,000 in an account that earns 7 percent interest per year by the time college rolls around. When you're ready to start contributing, you'll need to settle on the right plan--and that can be confusing. Here's our rundown on the most popular college savings vehicle (a 529 Savings Plan), plus two other devices suitable for stashing collegiate cash.
"I can't think of a better way to structure an account," says Jeff Nelligan, senior vice president and financial adviser with Morgan Stanley in Denver. He's referring to 529s, often called Collegelnvest plans in Colorado, and investors concur: 188,321 Colorado account owners have saved $3.4 billion. 529 Plans give more bang for the buck by allowing account owners--typically parents or grandparents--to invest money into future higher education expenses without being taxed on the earnings.
The first step is finding the right plan. This isn't like a 401(k), which is a national plan. Forty-nine states (all but Wyoming) and the District of Columbia offer 529 Plans that vary dramatically by state. In Colorado, you'll buy your 529 Plan through an agency called Collegelnvest, or through an investment firm. Because there's no residency requirement, you don't have to stick with Colorado's plan if another state's serves you better. Some families even buy plans in multiple states.
But, says Betty Lochner, past chair of the College Savings Plan Network (CSPN), "We always recommend investors start with their state's plan because a lot of times there's an incentive to do that." Colorado's state tax deduction, for example, can be persuading: Contributors may deduct the full amount of their contributions from their Colorado adjusted gross income. Colorado also has a dollar-to-dollar grant-matching program for low- to mid-income families, and a 529...