What's the Best Way to Save for College?

It's never too early to start thinking about saving for your children's college education — particularly as the tuitions continue to rise.

The College Board Advocacy and Policy Center estimates the annual yearly cost at between $3,538 and $14,054 for a two-year college, between $18,326 and $29,193 for a four-year public college or university and about $37,000 for a four-year private institution.

Experts agree it's important for parents to start early with a savings plan, and there are various methods available.

Some of the most popular options include:

• 529 Plan: A state-run education savings plan designed to help families set aside funds for future college costs. There are two types of 529 plans: prepaid tuition plans and college savings plans. According to the Securities and Exchange Commission, prepaid tuition plans allow college savers to purchase credits at participating colleges and universities for future tuition, while college savings plans lets parents choose among several investment options — including stock mutual funds, bond mutual funds and money market funds — for their contributions, which the college savings plan invests on their behalf.
• Coverdell Education Savings Account: An account created as an incentive to help parents and students save for education expenses. The accounts, which allow you to add only $2,000 or less a year, are exempt from federal taxes and can be used to pay qualified college expenses down the road.
• Roth IRA: Normally used as a retirement fund that incurs a penalty if money is taken out before age 60, there is an exception for distributions used to pay for qualified higher education expenses.
• Personal Investment Accounts: Allows parents to have more control of where and how, such as stocks, bonds or mutual funds, their money is invested.
• Life Insurance: Provides tax-free access to the cash value of the policy to pay for college expenses.

Other options include the Uniform Transfers to Minors Act or Uniform Gifts to Minors Act custodial accounts, which let you take advantage of your child’s lower tax rate, grants and Hope and Lifetime Learning Educational Credits, which provide tax credits for college expenses.

Chad Brooks is a Chicago-based freelance business and technology writer who has worked in public relations and spent 10 years as a newspaper reporter. You can reach him at chadgbrooks@gmail.com or follow him on Twitter @cbrooks76.