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How much should you save in a college fund?


Saving for College 101

Despite these eye-popping costs, experts say the best way to pay for college is to have a plan and stick with it. And thanks to the government, saving for college has never been easier. There are many ways to save, including the following:

  • 529 plans -- These state-sponsored plans allow parents to put their hard-earned cash in an investment account with their child as beneficiary. As the owner of the account -- named for the IRS code section that created it -- the parent does not pay income taxes on earnings. If the kid doesn't go to college, parents can transfer the amount in the account to another family member. Moreover, parents do not have to pay federal income taxes when withdrawing money as long as the cash is earmarked for college expenses, such as tuition and books. There are no income limitations and any unused money can be withdrawn without paying a penalty -- just the tax [source: CBS News].
  • Coverdell Education Accounts -- Coverdell accounts are set up by the U.S. government. They are tax-deferred accounts where parents can contribute up to $2,000 a year, and the earnings grow tax-free. Distributions are not taxed as long as they are used for legitimate educational expenses. Parents can also use Coverdell accounts not just for college costs, but for elementary- and secondary-school tuition [source: Internal Revenue Service].
  • Roth IRA -- Using a Roth IRA to save for college gives you flexibility and offers a number of advantages. For example, if you withdraw your Roth IRA contributions early for college expenses, you won't be taxed or penalized. You can also leave your earnings in a Roth for retirement, while withdrawing the principal to pay for the cost of education. In addition, if little Billy or Bonnie decides they don't want to go to college, or find some other way of paying for their education, you can simply keep the money in your Roth IRA instead of moving it to a different savings account [source: Biller].

Kids, don't think that you're off the hook because your parents have access to these and other programs. The average student borrows 14 percent to cover the cost of college, while only using 9 percent of their savings and income [source: Rampell]. To help mom and dad, students can apply for loans, grants and scholarships. Oh, yeah, you can also get job or two.

Welcome to your first class: Introduction to the real world!


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