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How to plan for your child's college costs

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By AJ Smith/

Raising children is expensive, especially if you plan (or hope!) to pay for their college education. We all know the best way to put yourself in a position to help your child with higher education costs is to save early and often, but it is also important to know how to save for your child's college.

Check out these tips to help you plan an easy transition and payment system for your children's education costs.

Plan ahead & set a realistic goal


While you do not know now where your child will want to attend, it is a good idea to get college estimates for several proxy schools so you do not underestimate college costs. Tuition rates tend to increase by about 5 percent to 6 percent annually, faster than inflation. When you are calculating how much you need to save to cover your child's education expenses,take this into consideration and plan early enough that saving won't dramatically affect your day-to-day life.

Consider all the tools


Which savings vehicle you use for your child's college fund plays a big role in how much you will have when it is time to start sending those tuition checks. Beyond a traditional savings account, you can use options like a 529 savings plan, prepaid plans, custodial accounts and Coverdell Education Savings Accounts.

A 529 state savings plan gives you the opportunity to earn stock-market returns on tax-deferred college savings. These plan are easy to access, have no income limit and no age restrictions. Prepaid plans vary by state and allow you to lock in tuition at public colleges in your state years in advance. The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) allow custodial accounts that require you put money or other assets in a trust for your child as a minor. You then manage the accounts until the child reaches 18 or 21, at which time the child owns the account and can use the money how he or she pleases.

Coverdell ESAs are similar to 529s in that the money grows tax-deferred but can also be used to fund private primary and high schools.

Take advantage of savings

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The "sticker price" of college tuition does not need to be what you pay -- it's a good idea to search for scholarships and grants, as well as to apply for financial aid. Beyond these efforts, you can qualify for a number of different education tax breaks.

There are several options, including the American Opportunity Credit, the Lifetime Learning Credit and tuition and fees deduction that can ease some of the financial burden. The IRS has specific rules about who can claim education credits as well as tuition and fees deduction -- so investigate and apply carefully.

Evaluate often


At the end of each year, be sure you evaluate your college savings potential and if necessary, adjust your savings plan. It is a good idea to sit down with your financial planner or partner and review the past year's savings versus income and future needs. Again, it's important to keep in mind the increasing costs of colleges each year.

If you need to take out student loans to pay for your child's college, keep in mind that your credit score could help you get a lower rate on private student loans. If you know or anticipate that you'll need to do this down the road, you can start working on your credit now so it will be in good shape when you need to apply for the funding. You can see two of your credit scores for free every month on

Preparing for the large price tag that comes with your child's college degree can be overwhelming -- but with the right research and strategic planning, you can fund your child's further education without sacrificing your retirement needs, life insurance payments or emergency fund.

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