How to Save Money for College: A Beginner's Guide

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The already high price of a college education – including tuition, room and board, books and other fees – has risen on an average of 6% per year over the last ten years. All research points to the likelihood that this trend will continue, meaning that a graduate of the Class of 2027 will be shelling out around $325,000 for a private, four-year college. Students who opt for a state school will pay about half that, which hardly seems like a bargain.

So, what's a parent to do? Most of us don't have an endless supply of money with which to fund our children's ambitions, but all of us want to do what we can to provide our kids with every opportunity. Fortunately there are a number of savings plans available. No one choice is the best for every family, so it's important to educate yourself about the various options before committing to a plan.

Taxable Accounts

• No limit on the contributions you can make
• No limit on the income you can make
• No restrictions on the use of the funds
• Potential to shift money into the child's name through UGMA

With a taxable account, you're able set aside money in whatever savings investment you chose. There are no restrictions on how that money is spent. But keeping control of your money comes at a price – you're responsible for the taxes on any income generated by the account. To reduce the amount of taxes you're paying on your taxable account, you can choose to put the money into your child's name through the Uniform Gift to Minors Act (UGMA).

Many parents choose to go this route because even though the money is in their child's name, they still remain the custodian of the account until the child reaches adulthood. The parents get a tax break on the investment's first $1,500 of income until the child turns fourteen; after that they're charged at the tax rate assigned to the child, which is typically less than the adult rate.

While taxable accounts work very well for many families, there are some considerable drawbacks. For one, if the account is in your child's name and he or she chooses not to go to college, the money still goes to them once they come of age. This means that your 18-year-old son or daughter can take the money you've been putting aside for them and use it to buy a car, backpack through Europe or just follow their favorite band across the country. If that child decides at 25 that college really is a good idea after all, that money is gone. The parents have no control over that.

Another potential problem is that having so much money socked away in his or her own name can greatly reduce your child's chances of being awarded financial aid. The formula used to calculate a student's need for aid takes both his or her own assets into consideration as well as that of the parents, but assets held in the student's name are given more weight.

Coverdell Education Savings Accounts

• Can contribute up to $2,000 per year, per beneficiary
• Can be switched to another family member under the age of 30
• Money can be used for college, K-12 expenses and other educational needs

If you're interested in a taxable account but want to maintain complete control over the funds and how they're used, you may want to consider a Coverdell account. Coverdell accounts work much like Individual Retirements Accounts (IRAs) and let you set aside money in tax-deferred investments. Because you don't owe taxes on the income until you withdraw the money, your savings grow faster. This can work to your advantage if you haven't gotten an early start on your college savings plan.

With a Coverdell account you can use the money for anything, but one of the biggest perks is that if you use the money for educational expenses it's likely you won't have to pay any taxes at all. And the money saved in a Coverdell account doesn't necessarily need to be used for college; you can use the money to pay for a high school sports uniform or a set of encyclopedias.

529 Account

• Specifically designed for college savings
• You maintain total control over your money
• Significant tax breaks are available

A 529 account will let you save up to $260,000, depending on the plan you choose. Some allow you to pre-pay into the account based on current tuition rates, while others take the annual increases of college costs into consideration. These "age-based" plans allow you to shift investments from stocks to bonds as your child gets older.

The biggest downside to 529 accounts is that there are more than one hundred different plans available from state to state. That means that doing the research to find the right plan for you and your family can be incredibly time consuming and confusing. Your best bet is to sit down with a certified accountant who has been specially trained in college savings plans and can help you sort through all of the details.

Paying for college can be overwhelming, but it is important to remember that a multitude of options are available to parents trying to plan for their children's future. By being informed and conducting the right research, you can ensure that your kids will be putting the right foot forward as they begin to navigate the long road to college.