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How to Plan for Your Children's Education

How to plan for your children's education through saving money and hunting for scholarships.

It's usually hard for new parents to find the money to start a college savings account or to make investments that will be used to help their child go to college, but if you start planning now, even if you don't make any huge financial investments, you will still be ahead of the game when it comes to paying for your child's education.

There are many state and national programs that are set up to help parents start putting money aside for their children's education in safe, high interest earning accounts.

Here's an overview of some of the most popular college savings options for parents.

529 Plans

There are two types of 529 college savings plans: prepaid tuition plans and savings plans. The money put into these accounts is all tax free. Any parent can open a 529 account no matter what their income is. 529 plans share many of the same advantages and disadvantages but there are slight differences in the two plans.

529 Savings Plan

The 529 Savings plan is the most popular college savings plan used by parents. The advantages of a 529 Savings Plan are:529 plans are not subject to state tax in most states. You can open a 529 account in any state, even if it's not the state you live in. 529 savings accounts have low management fees. The 529 plan allows for high contribution limits, so you or other family members can contribute up to $230,000 per year to the account without penalty. There are no income limits or restrictions. You can establish a 529 account for yourself if you are a non-traditional student and want to start saving money for school. Family and friends can also contribute to your 529 account. All account investments are professionally managed. 529 plans are accepted at every college in the United States.You can contribute as little as $25 per month. You can roll over an existing Education Savings Account to a section 529 Program.

There are some disadvantages to a 529 Savings Plan that you should be aware of as well. The disadvantages are that you don't control the investments. Once you deposit money into the 529 account you no longer have a say in how it gets invested. If you withdraw money from the account for any reason besides paying for school you will have to pay taxes on that money at a rate of 10% or higher. There are annual account fees that need to be paid, including account maintenance fees, administrative charges, and management fees. If you or the child that the money is for don't live in the state where the account is then that money may be subject to state income taxes. So if you open a 529 savings account for your child who lives with your ex-spouse in another state, the money that you put into a 529 savings account may be subject to state income tax. If your 529 Savings account is taxed, the taxes have to be paid from another account. You can't use the savings account to pay the taxes on the account.

Most parents find that the advantages of 529 savings accounts outweigh the disadvantages. The flexibility of the plan is something that parents like because it gives them options when it comes to managing the money set aside for their children's futures.

529 Prepaid Tuition Plans

A 529 Prepaid Tuition plan is similar to a 529 Savings Plan except the 529 Prepaid Tuition plan allows parents to actually purchase college credits at today's prices rather than the prices that will be in place when the child is ready for college.

So if a parent wanted to send their child to a school that has a tuition cost of $325 per credit hour by opening a 529 Prepaid Tuition account, those parents could buy enough credits for their child to graduate from college at $325 per credit even if their child won't be ready to go to college for another 15 years.

In 15 years, the cost per credit would probably be over $1000 so parents can save a lot of money by using a 529 Prepaid Tuition account to lock in today's prices for their child's education.

The obvious disadvantage of using a 529 Prepaid Tuition account is that you need to decide on a particular school when you open the account. So your child would have to go to that school regardless of what the child wants. Also, if your child decides not to go to school you're just out of luck because those credits that you are buying are nonrefundable.

So a 529 Prepaid Tuition account is great for parents who know what school their child wants to attend and that their child will, in fact, go to school and not flunk out or drop out. But for parents who don't want to force their child to go to a particular school Prepaid Tuition plans aren't a great value.

Just like a 529 Savings Plan, the 529 Prepaid Tuition Plan is not federally or state taxed unless the child lives in a state different than the one the account was started in, then it may be subjected to state tax.

Another advantage of the Prepaid Tuition plan is that, just like the 529 Savings Plan, anyone can contribute to your account. So family and friends can contribute to the child's education whenever they have some extra money and want to help out.

You can also establish a Prepaid Tuition account for yourself, which can be very useful if you plan on attending college in the next few years. If you already know the school you want to attend you can lock in cheaper tuition prices by opening a Prepaid Tuition account for yourself.

Upromise Accounts

Upromise accounts are more like traditional savings accounts but it allows you to earn bonuses for shopping with certain companies. Every time you shop with a company that participates in the Upromise program, a portion of your total sale goes into your child's college savings account. Upromise accounts are not interest bearing, so it's in your best interest to have a 529 Savings account and link your Upromise account to that account where that money will earn interest.

Upromise accounts are easily linked to 529 Savings accounts. The assets in your Upromise account sit there until a periodic sweep when all the money in the Upromise account is transferred to the 529 Savings account where it will earn interest.

With a Upromise account you can save money for several future students at once; you don't need a separate account for each one. In order to make your purchases count for your Upromise account you need to go to the Upromise website and register your cards.

You register your credit cards, bank cards, even your grocery, pharmacy, pet store, or other store given discount savings cards. Then every time you buy something from a company that participates in the Upromise program, no matter where you buy it, some of the money will automatically go into your Upromise account.

Large, well known companies like Tide, Coca-Cola, Huggies, Keebler, Kellogg and others participate in Upromise so you can save money for your kids' education when you buy the normal household products and food that you need every week.