Saving for College – Options for Parents

I’ve been looking into saving for college options as a parent.

You can scare yourself by looking at the cost of a 4 year public education. With room and board you could be looking at $200k+. The shocking part is how much more affordable that seems once you look at out-of-state or private universities. For a newborn you would need to start saving around $400 per month. Yikes.

Options for Saving for College

Here are the options I considered:
  1. Coverdell ESA: Education Savings Account. Not tax deductible, grows tax-free. Has income limits around $95k.
  2. Custodial Accounts: Such as (UTMA/UGMA). Probably useful to pass stock to a child without incurring capital gains.
  3. Parent Retirement: Parent could defer saving for child’s college until their own retirement is fully funded. College savings might disqualify child from financial aid, plus parent retirement funds withdraw penalty-free to pay education.
  4. State Programs: In Texas there was a prepaid tuition program (TX Tomorrow Fund) that was such a good deal it’s no longer offered under original terms.
  5. Savings Bonds: I liked these as they were low-risk, anyone can get them for a child, and the Series I-bonds are a decent investment in an inflation environment. However, Treasury stopped selling paper copies and to do it online and have others add funds seems complicated. If you could still get them at the bank would be my preference as it was simple.
  6. 529 Plan: This is what Random Walk Down Wall Street suggests. Risk is if kid doesn’t go to college you pay taxes + 10% penalty on gains. I like Vanguard the best but have to start with ~$3k to not pay fees. Anyone can add to it in $50 increments online. It is suggested that if your state doesn’t offer a good program to open an account via Utah; worth looking into.
So, I think 529 is the way to go. I would probably put it in a Vanguard fund that has a target retirement date close to the kid’s 18th birthday.
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