Even relatively modest costs for higher education can be daunting for many families. Therefore, parents should consider starting funds to pay college costs for their children as early as possible. Creating a designated account for higher education may help you avoid “dipping in” for other purposes.

Under the current federal formula, a family is more likely to qualify for need-based financial aid if savings and investment accounts are held by the parent, rather than in the student’s name. For example, a parent might be the owner of a 529 college savings plan, with the child as the beneficiary. Such plans, offered by nearly all states and some private firms, can generate tax-free investment earnings to pay college bills.

Once children are finishing their high school careers, it may make sense to apply to multiple colleges—some more expensive than others. Private and public institutions could be in the mix. If students are interested, applications to virtually no-cost military academies and Reserve Officers’ Training Corps (ROTC) program scholarships also might be included, along with other specialty schools.

Accomplished children may receive more than one college acceptance, allowing the family to decide among the various opportunities. Published costs, net of any aid and tax benefits, might not be the main reason for making a decision, but they also should not be ignored. Everyone—students and parents—should have a reasonable idea of how the college costs will be covered.

Keep in mind that your child’s first college might not be his or her last place for higher education. Your child might start at a less expensive institution and wind up graduating from or getting a postgraduate degree from a more prestigious college or university.

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DISCLAIMER

This blog post is designed to provide information about complex areas of tax law. The information contained in this blog post may change as a result of new tax legislation, Treasury Department regulations, Internal Revenue Service interpretations, or Judicial interpretations of existing tax law. This blog post is not intended to provide legal, accounting, or other professional services, and is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services.

This blog post should not be used as a substitute for professional advice. If legal advice or other expert assistance is required, the services of a competent tax advisor should be sought.