The Smart Way to Save for College

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:

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:

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• Don't Buy Into These 3 Investment Myths
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