Congratulations! Is it a boy or a girl? How much does it weigh? What’re you going to name it? Ah yes! A new baby. What a thrill! There’s so much you have to think about, so much to do. You want your child to be the best of the best. You want them to grow up with a first-rate education at an elite school. Oh boy! How are you going to be able to afford an education? Costs are so high now.

Have you heard the latest statistics? They’re not pretty if you’re trying to save money. The cost of education is steadily increasing and it’s harder and harder to afford a good education for your children. So it’s not surprising that only one-third of parents today expect to be able to afford to pay for their child’s education. Just look at the position today’s students are in – the Canadian Federation of Students reports that current university grads will leave school with $25,000 in outstanding loans. What a way to enter the work force – knee-deep in debt.

But it’s ok – you can relax. You have many options and, with a little bit of shopping and homework, you’ll be able to find the one that works best for you. One of the most popular methods of saving for education today is a college savings fund. We’re going to show you here how college savings funds work. You won’t have to worry about getting a credit check – there’s no need for a credit report here. This is savings – not borrowing. After you read our simple explanation, you’ll see that you’ll be able to focus on bringing up your children without having to worry about the cost of their education.

Government encourages Americans to save

Education contributes to individual success, as well as to the nation’s productivity and competitiveness, so governments are constantly introducing and updating their financial aid programs. But their resources are limited – they can only do so much. For example, there aren’t nearly the number of grants given for education these days. Now you get loans, not grants – you have to pay them back.

However, the programs they do come up with certainly help out the average family who have children wanting to tap into the government’s mindset for improved education. But the responsibility has been placed largely on the family to save for their children’s education. And they’ve included grandparents as well as parents in that picture. But they don’t leave you entirely on your own. They have many suggestions for saving for your children’s education.

Doug Stotz, Managing Director of Strategy of Columbia Management Group, in the U.S suggests, “Using a credit card and earning contributions on everyday spending such as gas, groceries, dining out, and long distance phone calls, a…family can save hundreds for college each year, which can add up. These rebates can be transferred into a…529 account (we’ll explain that in a minute), where a $400 contribution would represent an 8% additional return on a $5,000 investment.”

When you’re setting up your savings plan, keep in mind the power of compounding – it can help your savings grow tremendously. Take this example: Make your lunch, instead of buying it. That could save you about $4 a day, or $80 a month. Invest that at 6% interest a year. If you start when your child is 3, then by the time they’re 18, you’ll have $30,998 – a good start in creating a college savings fund. That’s just one example of how you can make use of creative saving methods. But they also have the government-funded college savings plans available. You may want to consider federal student aid as an option as well.

College savings funds to the rescue

The success of mutual funds in the 1980s provided a perfect vehicle for college savings funds. Saving for education is a long-term investment. And mutual funds invested over a long period of time are almost always profitable. So, in 1996, the U.S. government introduced “529 plans”, named after the Section of legislature it represented. Money invested would grow while, at the same time, stimulate the economy.

There are 2 types of 529 plans:

Prepaid tuition plans, which allow you to prepay future tuition and fees at today’s rates. If the rates go up, your rate is locked in and won’t increase. The downside of these plans is that the funds must be used at the college where the plan is paid, taking away your choice of colleges.
College savings plans, the more popular choice, allow you to contribute to an account that you can use at any eligible educational institution.

Funds from 529 plans can be used for any eligible college expense, such as tuition, fees, books, supplies and room and board.

Most plans are managed by mutual fund companies. As with many mutual fund programs, you have a choice as to how you want your investments to grow. You can choose:

a portfolio of stocks and bonds that change with the beneficiary’s age.
a portfolio with fixed shares of stocks and bonds.
individual portfolios with varying investment strategies.

You can't manage the investments in a 529 yourself. But you can choose from dozens of plans offering mutual funds from such firms as Vanguard, Fidelity and Smith Barney. Naturally, your return depends on the performance of the funds and the fees you're charged, which in broker-sold 529s can be steep. But if you’re not satisfied with your returns, there's an out. Once a year you can pick different options in your plan, or you can roll your college kitty into a different State's plan, without taking a federal tax hit. (Whether the State will let you switch without a redemption fee or tax is another matter.)

Programs in Canada follow similar guidelines. You can get a Registered Education Savings Plan (RESP) to help save for the costs of higher education. The main rules of an RESP are:

You can choose the beneficiary, but they must be blood relatives under 21 years old.
You can invest a maximum of $4000 per beneficiary, per year, with a maximum lifetime contribution of $42,000 per child.
All gains in the plan are tax-deferred. When funds are withdrawn, they’re known as Educational Assistance Payments (EAP), and are taxed to the student, but at a low student rate.
Funds can be used at any eligible college or university, and it doesn’t necessarily have to be in Canada.

The Canadian government also has a grant, the Canada Education Savings Grant (CESG), which matches 20% of contributions up to $400 per beneficiary per year.

College savings plans and taxes

Nobody likes to pay taxes. And when we’re dealing with the large amounts that accumulate in college savings funds, taxes could be high. But this is another way the government encourages you to save for education. Money in 529 savings plans grow tax deferred and can be withdrawn free of federal tax if used for certain educational expenses. Those expenses include undergraduate and graduate tuition, supplies and room and board (on campus or off) at any public or private college or university. Most plans allow total contributions of more than $200,000, and there are no annoying income restrictions for contributors, as there are with so many other savings breaks.

Also, 529s have a gift-tax advantage as well: A couple can contribute up to $110,000 at once to each child or grandchild's account without owing gift taxes. The contribution is treated as five years' worth of annual tax-exempt gifts of $11,000 per year, per parent.

In Canada, RESPs let you defer tax on your investment income. Contributions aren’t tax-deductible, but earnings from the fund are. Just like in the U.S., tax is paid at the student rate when they withdraw the funds.

There’s a college savings fund right for you – just follow the plan

Shopping for a 529 plan can be a nightmare. No two 529 plans are alike. All States in the U.S. have created innovative college savings fund programs designed to meet the savings needs of their citizens. So, with different lifestyles and conditions in each State, plans tend to be varied. State-sponsored savings plans promote:

Planning for education expenses.
Saving for education expenses instead of relying on debt.
Reliance on family resources instead of total reliance on government aid programs.
State-level planning designed to meet the differing needs in each state instead of a “one size fits all” national approach.

No matter where you live, there’s a college savings fund that’ll fit your situation. You need to cover every aspect of saving when you plan for your children’s education. It’s not easy – but it’s worth it. You just need to formulate a plan, and follow it with discipline. Here are a few steps you can follow:

Figure out how much money you need.
Adjust your budget accordingly – eliminate unnecessary spending; cut high-interest debt.
“Power up” your savings; use strategic planning.
Choose the best college savings fund for you.
Choose the best money manager for your fund.
Choose the right portfolio.

If you follow these steps, you can achieve your goals. Don’t get caught in the stress-trap. It needn’t be that hard. Take the time to check out all your college savings fund options. If you do it systematically, the right one for you will present itself. All you have to do is go to school – then your children can go to school.

About The Author

Gareth Marples is a successful freelance writer working at home providing valuable tips and advice for consumers purchasing personal loans with bad credit, discover credit cards and fortune magazine online. His numerous articles offer moneysaving tips and valuable insight on typically confusing topics.

Investment Articles

Investment Page 2

How Currency Trading Works