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How do I save and grow money for college?

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Q: What is the best way to save and grow money for my son's college tuition?

A: Paying for college is a significant financial task, and increasingly students are leaving school with difficult debt burdens. According to the College Board, the average annual public college tuition for in-state four-year degree students is $9,410. For private colleges that annual figure jumps to $32,410. Expect these figures to be even higher by the time your son reaches college.

Those numbers make for some lofty targets to shoot for, so the earlier you start saving for a child's education, the more you are likely to come close to the target and reduce the debt burden your child has upon graduation. The following are a few things you should know about saving for college.

Section 529 college savings plans

Section 529 college savings plans are offered by states and by individual educational institutions. Contributions to these plans are not tax deductible, but any subsequent investment earnings are free from taxes as long as they are ultimately spent on legitimate educational expenses.

One nice feature of 529 college savings plans is that balances can be transferred to a new beneficiary if the original beneficiary does not spend all the money in the plan. This gives you some flexibility so that even if you over-save for the first beneficiary, you have others in mind who can put the money to good use. However, if you only foresee one beneficiary being able to use these savings, it is better not to put more money in the account than you are likely to use.

Note that since the tax benefit of 529 savings plans applies only to investment earnings in them, they have the most potential benefit if you set them up many years before the student reaches college, so they can shield several years worth of earnings from taxes. The benefit of these plans is sharply reduced if the student is only a year or two from college.

Investment choices

If you are looking for growth, long-term investments like stocks are the most appropriate. These are also risky, but you can dampen the risk somewhat by broadly diversifying your portfolio.

Because stocks are volatile, you should shift into more stable investments as your child approaches college age, eventually investing in fully liquid vehicles like savings accounts or money market accounts as the time for drawing money out of the account draws near.

Financial aid

You can sharply reduce your son's college expenses by making full use of the financial aid available to him. As he nears college aid, check out the federal financial aid application site at www.fafsa.com. When he starts considering particular schools, ask their financial aid offices about what assistance might be available.

One side benefit of working through all this - from early saving to managing the money to researching financial aid - is that it can be a learning experience for your son so he gains some important financial knowledge even before attending college.

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