Tips for Choosing College Savings Options

When deciding on what college savings option to choose, you must know and understand the following 4 topics:

1. Understand the Tax Benefits

Many savings options offer tax-advantaged ways to save. Taking advantage of these savings options may greatly affect how much you can accumulate for your child's college education. In addition to the federal tax benefits of many college savings options, there may also be state tax benefits. Savings bonds are usually exempt from state and local taxes. Many states allow you to deduct some or all of your contributions to a 529 plan if you're a resident of the state sponsoring the plan. In addition, states may offer other tax advantages for 529 plans. Because of these state tax benefits, you might want to check out your own state's 529 plan before considering other plans.

Everyone's tax situation is different, and state and federal tax law can be complex. We recommend you consult with your tax adviser about which college savings options are best for you.

2. Examine Fees and Expenses

All of the college savings options discussed in this website various fees and expenses. A college saving option with higher costs must perform better than a low-cost option to generate the same returns for you. Even small differences in expenses can translate into a large difference over time. Make sure you understand them or it could cost you.

While we explained the various expenses involved with many 529 plans, that does not mean that other college savings options don't have fees and expenses. If you invest in mutual funds through an ESA or custodial account, you should check the fee table in the prospectus to see how the costs of a mutual fund add up over time. If you invest in stock, make sure you understand how much in commissions you must pay and factor this into any gain you may make.

3. Understand Your College Savings Plan's Limitations and Restrictions

What happens to your college savings if your child decides not to go to college, you have another child, or you lose your job? These events could dramatically impact your college savings strategy. Most college savings options have various restrictions and limitations that may impact your ability to react to a changing situation. Carefully review any college saving options you're considering to make sure they have the flexibility and control you feel you need.

4. Know the Risks As Well As the Rewards of Your College Savings Options

Compared to saving for retirement, your college saving timeline is relatively short. This increases your risk and limits your ability to weather a market decline.

Before investing in any college saving plan, carefully evaluate it and its investment options. Investment options with higher rates of return may take risks that are beyond your comfort level and are not consistent with your personal goals. To learn more about the investment strategy of investment options you are considering and their risk, you should find and read the following materials:

• 529 Plans - Read the prospectus. This contains the investment strategy and risks of a 529 plan and its investment portfolios. Most 529 plans provide this document on their Web sites.
• Mutual Funds - Read the prospectus and shareholder reports. Prospectus and shareholders reports are usually available from mutual fund companies or your financial professional.
• Stocks and other securities - Read a company's registration statement or annual (Form 10-K) and quarterly (Form 10-Q) reports. These are available in the SEC's EDGAR database.