For example, avoid placing investments in UGMA or UTMA custodial accounts because those assets will be counted heavily against aid eligibility. If your child already has money in an UGMA or UTMA account, consider moving those funds into a 529 plan prior to filing the FAFSA. A special exception in the law assesses student-owned 529 accounts at the lower rate applied to parent assets. But realize that any capital gains triggered by liquidating the existing UGMA/UTMA investments can increase taxes and reduce financial aid eligibility.
Don't spend too much time planning for financial aid before your child reaches high school. Chances are the eligibility formulas as well as your personal financial situation will change significantly by the time your child gets to college.
Understand investment risk.No one wants to see their investments drop in value, yet the only way to protect against it is to choose principal-protected investments like CDs and money market funds. But those investments have little chance of keeping up with college tuition increases. Higher-yielding investments, like stocks, invariably involve risk. You must decide just how much risk you can accept in your college savings.
The age-based options in many 529 plans operate on the theory that you should accept more risk and potentially higher returns when your child is young and you have time to ride out the inevitable market cycles. As your child gets closer to college age, the investments in his or her age-based 529 account automatically shift more to bonds and money-market instruments. This way, a market collapse does not undo your college savings shortly before the money is needed to pay college bills.
Significant differences exist among competing 529 plans in how investments are allocated for beneficiaries at particular ages. For example, some plan managers believe an age-based account should have no stock market exposure for children within a year of going to college. Others feel that a properly weighted portfolio should continue to have a modest amount of stocks even for those who are in college.
Be grateful for grandparents.Surveys suggest that many grandparents are happy to help finance their grandchildren's college education. But grandparents are also concerned about having enough money for retirement.
A 529 plan can be the perfect solution for one simple reason: The account owner can request a withdrawal of money from a 529 plan at any time and for any reason, subject to tax and a 10 percent penalty on the earnings. Most 529 plans also permit grandparents and other third parties to make contributions directly to an account established by the parent.
Start saving early.With college costs increasing at an average annual rate of almost 6 percent, it's best to start your college savings fund early in your child's life.
If you begin when your child is born and set aside $200 each month in an account earning 6 percent annually, you'll have enough to cover approximately 21 percent of the cost of four years at a private college (current average sticker price of $35,600 per year), or about 49 percent of the cost of four years at your public university (current average sticker price of $15,200 per year). If you start at age 12, you are looking at $350 per month.