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My kids are now 20, 18 and 14 and the ways of saving for college have changed tremendously since my oldest was born. The state of the economy has also cycled through a few things since 1981. How I saved for each child has also been slightly different because of changes along the way. This post is meant to give others a few thoughts to consider and, in no way, should be considered proscriptive.

Our promise to our children was 4 years of tuition, room and board at the college of their choice. This left the kids with books and personal expenses so they also had a stake in the action. They were also expected to do well in high school but that tied into getting admitted to the college of choice. There were no financial incentives to choose one college over another.

For our oldest, we used UGMA accounts (see www.fairmark.com/custacct/index.htm for pros and cons) for everything. I work in higher education and I was reasonably sure that no need-based aid would be offered to us. We referred to this money as “your college money.” I didn't worry about her using it for another purpose because had that happened, it would have been the last money she ever received from us. I don't think we ever told her that but there was never a question of how the money was to be used. As it turned out, I wanted to turn some of it over to her in a lump sum (so she could budget for monthly room & board expenses) and found out I couldn't. The age of majority both in our home state and her college state is 21. For the most part, her money was in CDs, drips and mutual funds. CDs were paying in the double- digits in the early 80s. Mutual funds could be started with a monthly investment of $25 or $50 back then and discount brokers and the Internet were unknown. The drips were really more trouble than they were worth because each company changed at least once and one of the companies was AT&T. She's starting her senior year and we are paying this year's expenses mostly out of current income. She received an AFROTC scholarship that has paid much of her tuition for the years 2-4 of college and in recognition of that, we bought her a computer. The scholarship also gives her a monthly stipend that increases every year and money towards her books. We did use some traditional IRA money her first year for a couple of reasons. Because it was the lowest income year in awhile, the taxes were less and from my projections, the taxes were less than they were going to be when we would be forced to take distributions. We used the opportunity to shift the money out of the pretax account and added to the taxable accounts.

My older son just finished high school and heads off to college in the fall. While most of his money is in UGMA CDs and the money market fund now, he also had mutual funds and drips. I did have some individual stocks while he was in jr high and early in high school. The best move I made for him was absolutely, positively to move 25% of his money to safe ground every year he was in high school. He also has a tiny Ed IRA (now Coverdell account). Under the old limits and because of his age , we had only one year we could contribute. He heads off to college this fall to the college with the best academics and the coach who he clicked with. While he was awarded scholarships for all of the other schools where he was admitted, he didn't get one here. I still agree with his choice. His school offers a program where, if you either pay for all 4 years, borrow it all or a combination, you freeze the costs at this years prices. If you borrow, you can use home equity to make it deductible. We are paying the first year and borrowing the rest. I plan to pay off at a faster rate during his middle 2 years when we only have one in college. I'm not concerned about this borrowing because we have a healthy net worth and the retirement is pretty much taken care of. I am also very concerned about the expected increases in the cost of higher education over the next few years.

My younger son is a sophomore in high school and the changes have had a small effect on what I've done with his college savings. His was started with UGMA money in mutual funds. He had no drips but some individual stocks with a discount broker. He has a slight larger Coverdell account because I managed to get 2 years where I invested in that for him. (Both boys' Coverdells were in stocks at a discount broker.). He also has a 529 (see www.savingforcollege.com ) that I started a little over a year ago. Our state made the change to give a tax advantage to residents and I started a small monthly investment in one for him. I'm not thrilled with it for several reasons. The service stinks and if it were any other financial account I had, I would not continue it. I also really dislike the lack of choice. There is no absolutely safe option, like a money market fund, for the last few years. I will probably leave the monthly investment going but stash to maximum in the Coverdell this year. I worry the least about saving for this son because for his last 3 years of college, he'll be our only dependent.

One thing we haven't done but I might consider is having non-dividend producing stocks in our name and gifting the maximum ($11K) per year to a child beginning when they turn 14. I have also filed tax returns for each child for pretty much every year. It was a pain but the past few years, there was a bonus. Our state had tax rebates that you received if you filed a Federal tax return. One other piece of information, we couldn't convert to Roths and we aren't qualified to have them.

Other changes may occur next year with the Reauthorization of the Higher Education Act. The treatment of anything for financial aid calculations is probably something to keep an eye on – check with your senator or congressman.
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