Saving Money for Your Kid's Education

In the next 15 years, a four-year degree at state colleges will run upwards of $40,000, and a private-college education almost $500,000! (Yes, half a million dollars!) That's a whole lot of dough to think about ponying up for your little kid, who might be more into My Little Pony right now.

Just as with retirement, it's never really too early to save for your kids' college education. But before you do, you absolutely have to do these three things:

1. Get out of credit card debt.

2. Set aside an emergency fund.

3. Set up your retirement savings.

If you don't have any of the above, do not pass Go, do not collect $200. I'm serious! You must, must, must get your financial ducks in a row first, before you can start saving for your kids' future college costs. But the good news? You don't need to save $500,000! I recommend saving no more than half, hopefully no less than a third of college costs. Your future student can take on student loans and scholarships, and grants can kick in the rest.

So what are your options? You've got two ways to start saving your money tax-free for school:

• 529 Plan: This is an education savings plan run by a state or educational institution. You can opt for a pre-paid 529 plan or a savings 529 plan. The savings plan works like a 401k, where your investments go up or down in value depending on the market. A pre-paid plan allows you to pay all or some of the costs of in-state, out-of-state, public, and private college fees through different types of payment contracts. For more information on 529 plans check out the ParentsConnect article, "What on Earth is a 529 Plan?"
  
  
• ESA:This is the Coverdell Education Savings Account, which works a lot like an IRA. You make an annual non-deductible contribution; your account will grow without being taxed, and if all goes well, you'll be able to make tax-free withdrawals. But just like an IRA, you need to meet certain requirements to make contributions and withdrawals. Once your child turns 18, you can no longer make contributions to the account. Even if your kid doesn't go to college, the money will still go to him or her, and will remain tax-exempt until age 30. But it has to get used up by then. Also, you, the parent, can't take the money back for yourself.
  
  For more information on both types of plans, visit savingforcollege.com. You can shop for a plan that has low fees and find ways to spread your money around.

The takeaway: Saving for your kids' education today will no doubt help your children the future, but it should not be done at the expense of your own savings and retirement funds. Your children can always take out student loans and get scholarships—but make sure you're taking care of you, too!

Want more money-saving tips? Check out our Recession Proofing Boot Camp!