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The smart way to spend your college fund

After years of saving, it's finally time to start spending for all those college-related expenses. There's a smart way to do it.

If you want to get an "A" in spending that college fund, you'll need to watch the order in which you tap accounts if you want to maximize financial aid and scoop up federal tax credits.

Let's start by looking at strategies for maximizing financial aid. Some savings plans for college can really eat up a student's eligibility for financial aid. The colleges use formulas that look at how much money students have set aside through such means as Coverdell education savings account or state-based, prepaid tuition plans. More saved money means less student aid.

To maximize aid, you'll want to spend down the money in these accounts -- and spend them in the right order.

Spend the student's money first
You'll also want to spend any money in a student's name before tapping any account in a parent's name. This simple move can make a difference in a student's eligibility for future aid.

Here's why. If a student has assets, financial aid officers expect students to contribute 35 percent of the money toward college expenses each year. Parents are expected to contribute only 5.6 percent of their assets toward college expenses each year.

So the less money saved in a student's name, the better your child's chances of scooping up some financial aid.

Aid officers consider a Coverdell education savings account, formerly known as an education IRA, an asset of the student. The best advice for families with money stashed in Coverdells? Spend that money ASAP.

That won't be hard to do. The cash in a Coverdell account can be applied to a wide range of educational expenses from kindergarten through high school and on through college and graduate school. The money can be used to pay for everything from tuition, books and fees to academic tutoring and personal computers.

Many financial advisers encourage parents to tap Coverdell accounts while students are still in high school.

Using up the savings in Coverdell accounts prior to college will help boost students' eligibility for financial aid in their freshman year. To maximize aid, you'll want to spend as much Coverdell money as you can through December of a high school student's senior year. Financial aid forms for college can be filed as early as January of student's senior year.

Another option for families with a Coverdell account is to roll the money over to a younger sibling. This will free up more financial aid for the older brother or sister who is heading off to college and make more money available for the current educational expenses of the younger sibling.

Next up: prepaid tuition
If you have any money stashed in a prepaid tuition plan you'll want to use this money right off the bat as well.

To participate in a state's prepaid tuition program, the contributor, typically a parent or grandparent, or the beneficiary, the future college student, must be a resident of the state.

Next: If your income exceeds that limit ...
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