Secrets to Saving: Your Child's College Education

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It's never too early or too late to start saving for your child's college education.

Families can save for future college costs with tax-advantaged savings vehicles, including Coverdell education savings accounts (otherwise known as ESAs) and 529 plans, which are offered by individual states.

There are two types of 529 plans: a prepaid tuition plan and a college savings plan.

A prepaid tuition plan allows you to purchase future education credits at today's tuition prices. Credits can generally be used at any educational institution accepting federal financial aid. A college savings plan resembles a 401(k) plan: you choose from an array of investment options and contribute to them over time. Your earnings grow, tax-free, and are tax-free upon withdrawal if they are used for qualified education expenses.

How much do you need to save? To help you develop a savings strategy, check out the college calculator at Just enter your estimated college costs and current savings levels and it will determine how much you should save each month to reach your goal.

Investment Plans

10 or more years until college:

It may be a good time to visit a financial planner to investigate all of the available options. Financial planners have some tricks up their sleeves that can help shelter college savings from financial-aid calculations.

Experts recommend putting at least 80 percent in equities at this point, with 20 percent of a college-savings portfolio devoted to fixed-income investments, such as bonds, CDs and Treasuries, according to Many 529 plans offer age-based portfolios with this type of mix for long-term investors.

"Contribute money every month, perhaps by signing up for an automatic investment plan. Contribute extra money whenever possible," Mary McConnell, director of college savings products at Charles Schwab, told

5 to 10 years until college:

Parents with kids ages 8 to 13 still have a long time until they will need to take their first withdrawal. Those who have been investing all along will probably want to re-evaluate their needs and recalibrate their strategy.

For parents playing catch-up, saving a substantial amount will require bigger contributions. The temptation to use some market momentum to buoy returns should be avoided for the most part. While there is time now to recoup losses experienced in the market, it may be prudent to pare back risk on investments and allocate more funds toward conservative investments as your child heads into the teen years.

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Saving for College

3 to 4 years until college:

With a shorter time horizon, the late starter will likely have a different investment mix than an early starter.

A common mistake is to make up for lost time by gunning for the highest returns possible with an aggressive investment plan.

As evidenced by recent market performance, that mistake can be costly if you're caught in a downdraft. While the set-it-and-forget-it option may work in the early years of college planning, parents should check, in the final years, to make sure that the investments reflect the amount of risk they're comfortable taking with their college fund.

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