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Saving for college

Chris Farrell Jun 24, 2010

Question: I’m a recently divorced single mom working a job that doesn’t pay great, but I make enough to live comfortably within my means. I spent 5 years out of the work force as a stay at home mom and now want to start setting aside money for my daughter. My grandparents have been generous enough to put some money into a bank account for her to go towards her college education. I was thinking of starting a 529 fund and/or savings bonds. However I have no idea where to begin with 529’s and I’m not sure how safe a bet federal savings bonds are anymore. Any advice would be great. Thanks! Victoria, Ypsilanti, MI

Answer: It isn’t easy financially being a single parent. That’s why I always emphasize the importance of paying yourself first.

Before you start saving money for your daughter’s college education I would make sure that you have built up a solid foundation of savings that you can tap during rough patches. You should also be setting money aside for your retirement. You can always use your savings to help defray the cost of college.

However, with the grandparent’s money–and maybe yours, too–there are some good choices targeted specifically at higher education.

Savings bonds remain one of the safest securities in the world. They’re backed by the federal government or, more accurately, the U.S. taxpayer. You won’t make much interest off the savings bonds, but the money will be there when you need it. An additional advantage of savings bonds is that some or all of the interest may be excluded from federal income taxes when the bonds are redeemed if the money goes toward qualified college education expenses. The bonds need to be registered in your name and not your child’s name to take advantage of the college-related tax break. There are also income restrictions.

You can learn more about savings bonds and college here. The IRS has a publication that deals college and taxes.

When it comes to college money questions my favorite resource is finaid.org. The information is consistently good and it’s constantly updated (an advantage of a website). I like their sober-minded approach to all things related to money and college. I like savingforcollege.com for learning about 529 plans and comparing the various offerings by the states. I have a chapter in my book The New Frugality that goes into more detail on how I approach saving for college, including 529 plans.

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