Save-For-EducationA college education is one of the most expensive things a person will buy in his or her lifetime.  It ranks second only to a home for many consumers, and may cost you more than many kinds of new cars.  It only makes sense to learn early on how to save money for your child’s college education.  After all, the earlier you begin saving, the easier it will be to avoid the need for a loan later on.

Providing your child with some type of post-secondary education, whether it’s a university degree or trades certification, is still the best way to ensure a secure future.

Many new parents want to save money for their childrens’ education, but they don’t know how to begin.

Setting aside even a small amount of money each month in a savings account is a start.  However, there are ways that you can maximize the money that you do put away.  Here are some ideas for making the most of your educational money saving:

* Open up a tax-sheltered educational savings account: In the United States you can save for a child’s future education with a 529 plan.  529 vary from state to state.  Generally speaking, there are two ways you can save with a 529 plan.

One way is to open an account and make monthly deposits as you would with other types of savings and investment accounts.  The performance of your monthly investment is based on the market.  Any gains that you make are tax-sheltered as long as you eventually use the money at an accredited US educational institution.

The second type of 529 account is the pre-paid tuition plan.  With this plan, you lock in the cost of tuition at today’s cost.  The money that you deposit into the account does not accrue interest.  Your gains are based on the difference between today’s tuition price and the actual cost of tuition at the time the money is withdrawn for the student’s education.

Many other countries have their own versions of the US 529 plan.  In Canada, parents can purchase a Registered Education Savings Plan (RESP).  Deposits gain interest based on market performance.  Plus, the Canadian government may match a certain percentage of what you put into your RESP.  All monies are tax-sheltered as long as the money is used at an accredited educational institution.

* Coverdell Education Savings Account (ESA): This type of fund is similar to an IRA, except the funds are earmarked for education rather than retirement.  A working American is allowed to deposit up to a certain maximum of after-tax dollars each year.  (This amount has undergone changes over the years.  Check with your local financial institution to find out what this maximum is.)  This money, plus any accrued interest, is not subject to tax (even upon withdrawal) as long as it is used for the purpose of paying for a college education.

* Custodial savings account: This is similar to an ordinary savings account.  A parent opens the account in the child’s name.  The parent remains as the “custodian” of the account until the child is of age (typically around age 18).  Until then, the parent has sole access to the funds.

Parents are allowed to deposit as much as they want.  Earnings up to a certain maximum (check with your financial institution for this figure) each year are free.  Any earnings over and above this maximum are taxed at a child’s rate.

Each of these options has benefits and drawbacks.  Parents should meet with a loans officer to discuss which savings option would be the best for their particular situation.

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