Do your homework: Saving for college pays off

Karen Caffarini

Many parents begin investing for college before their children enter preschool, but whether they’re able to stay on course for the next 15 years is another matter. A Sallie Mae/Gallup poll conducted in September found only 29 percent of parents are on track with their savings plan.

Financial advisers say there are several investment tools that can be combined and started at any time, no matter what your child’s age. Here are a few options.

Savings, market accounts

A more conservative approach, this plan is used by 59 percent of families saving for college, Sallie Mae spokeswoman Debby Hohler said.

Adviser Scott Laue of Savant Capital Management in Rockford, Ill., said parents can begin setting aside money in one of these accounts specifically for college tuition at any age, but he warns they are easier to dip into through the years if money is needed elsewhere.

529 plans

Offered by every state, these plans allow investors to make large lump-sum contributions. Parents can make up for lost time with these plans, making them a good idea no matter what age your child is, said Mary McConnell, Charles Schwab’s director of College Savings Products and Services.

Their lifetime limit is about $300,000, contributions grow tax-free and withdrawals are tax-free if used for qualified education expenses, McConnell added. They can be started by anyone, including grandparents.

Stocks and bonds

Stocks and mutual funds are the second most popular college savings plan, according to the Sallie Mae poll.

This approach can help your money grow when your child is still an infant or toddler, provided you have a higher risk tolerance, McConnell said. As your child begins to think about college, switch to less risky investments, such as shorter-term bonds and money market funds, she said.

Coverdell accounts

These education savings accounts are used by only 11 percent of families, according to the Sallie Mae poll. Laue says there is good reason.

“They allow contributions to be made on an after-tax basis, and earnings grow tax-free as long as it is used for college. But you can only put $2,000 a year in the account, so it won’t get you far,” he said. Plus, there are income limits.

Retirement accounts

Although financial advisers strongly advise against it, 29 percent of poll respondents use 401(k) loans or dip into their IRAs to pay for college expenses, especially as their children get older.

Laue said you can dip into your IRA for qualified college costs without the 10 percent penalty before age 59½, but you still pay income tax on the amount. The 401(k) loan could have higher interest than a government loan.

Where to turn for help

Here are some online resources for financial tips and advice: The Sallie Mae Education Investment Planner Everything

families need to know about college Where to apply for

financial aid The definitive source for all states’ 529 plans