Saving for College: But Wait! There's More!

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People went to college long before an Internal Revenue Code existed, and parents and grandparents saved for college costs even when tax deferrals and/or tax exemptions weren't around. You can save money in a lot of other ways, some of them even specifically for college. Even though they may not be as tax advantageous as Section 529 plans and Coverdell ESAs, they may make perfect sense in your overall savings plan. And if you're not able to save enough to cover the full cost, all is still not lost: Various scholarships, grants, and loan programs are available to cover any shortfall you may have between what you've saved and the cost of your child's education.

Rediscovering U.S. savings bonds

Whether you're able to save only small amounts, are uncertain about your potential student's future plans, or love the safety and security found only in U.S. savings bonds, you may find them to be an attractive way to save for future college expenses and still take advantage of some tax exemptions on the interest earned on your bonds. (See 529 & Other College Savings Plans For Dummies, by Margaret A. Munro [Wiley], for more details.)

Saving for college the old-fashioned way

It may seem strange to even think this thought, but the trade-off for taking advantage of the income tax breaks available through Section 529 plans and Coverdell ESAs is that you're guaranteeing that you will use that money to pay for qualified educational expenses. If only all of life were so certain and so sure.

You may be hesitating over how much to save in these plans, or whether to save at all, because of your great uncertainty over your child's future plans. When you save in traditional investment and savings accounts, you eliminate that uncertainty because you're not tied to using your savings in any one way. Of course, in exchange for that freedom to spend your savings as you will, you lose any opportunity to defer or exempt tax on your earnings. But if your world is an uncertain place, you may find that's a small price to pay.

Putting your faith in a trust fund

For most people, the phrase trust fund brings to mind visions of great wealth and privilege; in other words, it has nothing to do with you. That picture couldn't be further from the truth. If you're able to save money in any form, you're a potential candidate to create and fund a trust.

Saving in your retirement accounts

Using retirement funds to pay for college probably isn't the best way to put away money for college. In certain limited circumstances, however (such as when parents are older or you face completely unplanned educational expenses), it may make some sense to access funds from a retirement account to pay qualified educational expenses.

Accessing your home equity

If you (or you and the bank) own your own home, you may be sitting on a larger nest egg than you ever considered. A combination of rising home values and shrinking mortgage loan balances has created a large pool of equity for many people that may be made available to fund educational expenses. However, recent housing market jitters and credit crises may have made this avenue less attractive.

Identifying sources of free money

Not every potential student is an academic genius or a future first-round NFL draft pick, but you don't necessarily need to conclude that your child won't qualify for scholarships and grants. Your local high school guidance counselor or library should be able to point you in the right direction. Many states now offer full scholarships to academically qualifying students at their state universities and colleges, and some private universities and colleges are capping tuition costs for low- and middle-income families.

Borrowing to fill in the gaps

You're probably reading this section because you don't want to have to resort to borrowing money to pay for your children's college costs. But if you do, it's not the end of the world. Many types of financial aid are available at low interest rates.

This article was authored by Ted Benna, Stephen R. Bucci, James P. Caher, John M. Caher, N. Brian Caverly, Peter Economy, Jack Hungelmann, John E. Lucas, Sarah Glendon Lyons, Margaret A. Munro, Brenda Watson Newmann, Mary Reed, Jordan S. Simon, Kathleen Sindell, Deborah Taylor-Hough, John Ventura.