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The Smart Way to Save for College

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We all know how important it is for parents to set money aside toward their children's education. If you start early, your money has plenty of time to grow between now and when your kids head off to college.

So I was delighted to see that the First Family is setting a good example in this regard. According to a recently disclosed financial filing, the Obamas have set aside between $100,000 and $200,000 for their two children in the Illinois Bright Directions College Savings Program.

This offering is one example of a 529 plan. Each state offers one or more of its own 529 programs, but many don't require you to be a state resident in order to participate. They vary in attractiveness, so if you're in the market for one, shop around -- and see whether your state offers special tax benefits to residents.

One great benefit of 529 plans is that they're generally flexible enough to let you save as much as you can afford. The Bright Directions plan, for instance, allows contributions up to $320,000 per child. In contrast, one alternative to 529 plans, the Coverdell Education Savings Account, only lets you invest $2,000 per beneficiary annually.

They also give you tax-free growth on money spent on college expenses. This is a big deal, when you consider that the annual cost of tuition, room and board at many colleges already tops $50,000. College is simply a very expensive proposition for many Americans, and it will likely get much more expensive over time. Don't lose hope, though -- there are lots of ways to afford it.

Nitty-gritty
Out of curiosity, I took a closer look at the Bright Directions plan. It provides a large range of investment options, including age-based portfolios that provide a mix of different funds. For example, its most aggressive plan for kids aged zero to eight invests 72% of your money in domestic stocks, 25% in international stocks, and 3% in real estate. Here are a few of the nine funds it's invested in, along with their top holdings:

Fund

3-Year Average Annual Return

Recent Top Holdings Include

DFA U.S. Large Cap Value I (DFLVX)

(12.6%)

AT&T (NYSE: T  ) , Comcast (Nasdaq: CMCSA  ) , Time Warner (NYSE: TWX  )

T. Rowe Price Institutional Large Cap Growth (TRLGX)

(4.9%)

Amazon.com (Nasdaq: AMZN  ) , Qualcomm (Nasdaq: QCOM  ) , Wal-Mart (NYSE: WMT  )

Oppenheimer International Growth Y (OIGYX)

(2.4%)

Total, Infosys (Nasdaq: INFY  )

Data: Bright Directions, Morningstar. Performance is for underlying funds and does not include 529 plan expenses.

If you're saving for someone's college education, look into 529 plans and what they might offer you. It might prove to be the difference between your kids going to the college of their choice or not.

Here are more tips for getting your savings on track:

Longtime Fool contributor Selena Maranjian owns shares of Time Warner and Wal-Mart. Amazon.com is a Motley Fool Stock Advisor selection. Wal-Mart is a Motley Fool Inside Value recommendation. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


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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 June 22, 2009, at 11:58 AM, thedave357 wrote:

    CollegeInvest offers three distinct college savings plans. Within these three plans, you’ll find a variety of options, from great growth potential to slow and steady earnings, or somewhere in between, check out: http://www.collegeinvest.org

    Before investing you should check with your home state to see if it offers a 529 program. That program may offer state tax or other benefits to residents of that state that may not be available to investors in programs of other states.

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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