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Save for Baby's College Education Before Birth

Katlyn Joy | 6, July 2014


It's a daunting thought; the average amount of money needed for four years of college in 2032 is estimated to be around 0,000. So for you folks expecting a baby, that is the anticipated cost at a four-year public university. If you are pregnant now, here are some options you might want to look into:

Open a college savings plan, specifically a 529 plan.

These plans are rather like an IRA or 401(k), offering tax breaks. If the money is spent on tuition, parents never need pay taxes on the money. These plans are considered owned by the parent, not the child or student, and you are free to use the funds on undergraduate or graduate school, or a 2 or 4 year school or program. The money just has to put towards legit school expenses such as tuition, room and board, books, supplies and fees. The parent determines the beneficiary, and that person may be changed, but it has to be a relative such as a child, grandchild or niece or nephew. If the money is withdrawn for another person or purpose, you have to pay a 10 percent tax penalty in addition to the taxes on the earnings.

For a general idea, if a family socked away 0 a month into such an account, by high school graduation you will have saved approximately one-third of the money needed for higher education. If you open the account before your child is born, you may name yourself as beneficiary, and then switch it to your child's name once born and assigned a Social Security number. This can be a great way to accumulate some savings, by letting people know they can contribute to the account around the time folks are planning baby showers and such for you.

Compare state plans to find the one best for you; they are not all the same. It doesn't matter which state you live in, or what state your child eventually attends school in. Also, since you can switch up beneficiaries, if your child only uses a portion of the account to attend one year of college then decides to join the military, you can use the funds to go back and grab your MBA, for instance. Some states also offer incentives, such as matching funds for people under a certain income level.

Take care of retirement funds first, then look at college money.

Most experts agree, this is the most prudent approach. It is fairly simple to see why. College will take four years; retirement should last far longer. You can borrow for school, but unfortunately, not for retirement. Plus you can use your retirement if need be for college costs, although that should be avoided, for the same reasons listed above.

Prepaid tuition plans.

These are great options when you are certain your child will attend a public university in-state. They sort of work as an insurance policy. If you invest a set amount, you are assured that your child will receive a set tuition amount, regardless of tuition inflation. However, there are penalties for using the money for other things than college expenses, and it can actually hurt your financial aid package, so look carefully at this option before jumping in.

Open a grad save account while still pregnant.

This allows friends and family to contribute to the educational fund online, prior to a name and Social Security number. Some parents opt to transfer money from these accounts into a 529 later. The ease of putting money into the account is the attraction for many families with relatives spread all over the country.

Avoid costly mistakes.

Don't decide to avoid all savings because that counts as an asset when determining financial aid. Financial aid is greatly dependent on income, rather than what you have to show for it. Funds that belong to your child will not be as protected as the accounts mentioned here, which are designated property of the parent. Don't put all your funds into college and ignore retirement funds. That college degree won't be such a gift if you have to move in with Junior for the last dozen years of your life.

Doing Nothing.

If you are barely making ends meet now, and trying to prepare for your child's future you may be borrowing against their present. Let your child do what most of us do; work, scrimp, borrow and beg. An education does mean more when you've earned it.

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