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This Plan Will Get Your Kids Graduated

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If you want to prepare your kids for starting their lives on their own, one of the best things you can do is to give them your financial support for college . To do that, you need to do more than just take advantage of all the tax benefits and investing incentives for college savings. You also need to know exactly how all those things fit together into a single cohesive strategy that you can use to track and assess your college savings throughout the years.

Throughout September and October, we've been taking a look at a number of things that people do to boost your college savings. Now, though, it's time to gather all that advice together into a simple four-step game plan you can follow to get your kids from today to graduation day without breaking your budget.

1. Open a 529 account
I've already written about the many benefits of 529 plans. Despite a somewhat challenging learning curve, it's worth taking the time in order to take advantage of tax-free growth on the money you invest toward college expenses. In addition to state income tax deductions that many states offer, passing up 529 plans rarely makes sense.

To pick a plan, first check plans in your own state. That's often the only way to get a state tax benefit. But that doesn't mean you should pick it automatically. Sometimes, the added costs involved make it better to go outside your state even if you give up that state tax break by doing so.

Then look closely at the lowest-cost 529 plans available. Right now, plans from Nevada, Utah, and Ohio are among those with several low-cost investment options. Compare various features and fees and go with the plan that gives you the best complete package.

2. Figure out how much to invest
Once you have your 529 plan in place, the next question becomes how much you need to invest between it and alternative college savings strategies. Obviously, without knowing which school your child will attend or what will happen with college costs between now and when your child starts college, it's hard to gauge exactly how much to target.

But you can get a general sense. With average college costs now around $40,000 per year for private schools, saving an inflation-adjusted $10,000 a year for 16 years, or $20,000 a year for eight years, will pay for an entire four-year college education if your investment returns match inflation. If stocks start behaving like they did throughout the 1980s and 1990s, then even if you can't save that much, you could still reach your goal with aggressive investments.

3. Take advantage of special offers
Certain programs can boost your college savings. For instance, Sallie Mae's (NYSE: SLM  ) Upromise program offers deals that let you accumulate college savings just from buying products you already use.

Upromise lets you save two ways. With retail partners that include Best Buy (NYSE: BBY  ) , Target (NYSE: TGT  ) , and Walgreen (NYSE: WAG  ) , all of the purchases you make online qualify to have a fixed percentage of the amount put into your Upromise account.

Alternatively, some products earn you a college contribution when you buy them at any of thousands of grocery and drug stores across the country. Procter & Gamble (NYSE: PG  ) and Pactiv (NYSE: PTV  ) are just a couple of the companies that offer college contributions when you buy their products from participating grocery stores.

A different program involves a credit card offered by Fidelity. The card makes a deposit of 2% of your purchases into most types of Fidelity accounts, including a 529 plan account.

4. Prepare for the financial aid battle
It's important to know the financial aid rules before your kids get too close to college age. By moving assets into retirement accounts, life insurance, or paying down your mortgage, you can effectively increase your child's potential eligibility for financial aid. Conversely, taking retirement plan distributions or realizing big capital gains at the wrong time can inflate your income, decreasing your aid award.

Congratulations!
If you've made it through our entire two-month college savings program, congratulations -- you're well on your way to providing an excellent education for your kids.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

The Fool owns shares of and has written covered calls on Procter & Gamble, which is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended buying calls on Best Buy, which is a Motley Fool Inside Value recommendation and a Motley Fool Stock Advisor selection. The Fool owns shares of Best Buy. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Dan Caplinger gets a little closer to covering his daughter's college every month. He doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy tossed its cap higher than anyone else on graduation day.


Read/Post Comments (1) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2010, at 6:27 PM, grindelsa wrote:

    We use this and Upromise. While Upromise is good, if you open a 529 through Fidelity (Deleware) you can get a credit card that puts 2% of all purchases into your 529 account. We run everything through this card, and as a result end up averaging over $900/year into our 529!! Great deal!!!

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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