- Pro: No limits on contributions
- Con: Your child ultimately controls the money
Custodial accounts, known as UGMAs (for the Uniform Gifts to Minors Act) and UTMAs (for the Uniform Transfers to Minors Act), let you put money or other assets in trust for a minor child and, as trustee, manage the account until the child reaches 18 or 21, depending on your state. At that age, Junior owns the account and can use the money for whatever he wants -- be it tuition, a trip to Europe or a new car.
There's no limit on how much a parent can put in a custodial account. However, it's smart to cap individual annual contributions at $13,000 to avoid triggering the gift tax. Speaking of taxes, full-time students under age 24 pay no tax on the first $950 of unearned income and the child's rate on the next $950. Earnings above $1,900 are taxed at the parents' marginal rate.
Investment choices in custodial accounts aren't restricted, as they are with 529 plans. That's a plus. On the downside, large balances in UGMAs and UTMAs can hurt chances for financial aid. Custodial accounts count as student assets, and the federal financial-aid formula calls for students to contribute 20% of their savings (versus 5.6% of savings for parents).
- Pro: Free money -- enough said
- Con: Financial-aid complications
You don't have to be an all-star athlete, a musical prodigy or even an "A" student to collect on private scholarships. Many are awarded to students based on need or special interests.
The best place to start your search is in the high school guidance office. A financial-aid officer at the college you're applying to can also help. Websites for exploring scholarships abound. A favorite is Fastweb, which claims to list scholarships worth a total of more than $3.4 billion. Register for free to have scholarships matched to your profile. Another free site worth visiting is College Answer, run by student lender Sallie Mae. Register to use the scholarship search tool.
While there are plenty of national scholarships, don't neglect to look closer to home as well. Many local organizations offer private scholarships, and the competition for these awards is less intense. Good ties may lie no further than an employer (student's or parent's) or a community group, club or lodge.
But remember: Schools may reduce aid if scholarships and aid combined equal more than a student's calculated need. But that might mean a reduction in loans.
- Pro: Make up for savings shortfalls
- Con: You have to pay them back
Saving for college ahead of time is, of course, preferable to taking on considerable debt. But if you must borrow, borrow smart. Go with government-sponsored loans, such as the Federal Stafford Loan (also called Federal Direct), which offer flexible repayment options and fixed interest rates. For qualifying students, Stafford loans are subsidized, meaning your child won't owe any interest on the loans while they're still in school.
You can apply for federal programs, as well as federal work-study, state programs and institutional aid, with the Free Application for Federal Student Aid, or FAFSA form. Parents can also look into federal PLUS loans, money borrowed by Mom and Dad on behalf of a student to help pay for college.
More from Kiplinger's Personal Finance magazine:
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It's important to keep in mind that you will owe tax on any earnings you withdraw unless you are 59½ and have held the account for at least five years. But if you and your spouse each save the $5,000 annual maximum ($6,000 if you're 50 or older) over 18 years, you'll accumulate $180,000 in contributions alone. With earnings of 8% a year, the total could top $400,000. That's enough to fund both tuition and a decent nest egg.
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