Looking for a vehicle for college saving
I have a hopeful twelve-year old and a hopeful nine-year old, both of whom we want to send to college. I opened 529 accounts for each of them and although we have been squirreling money away for them since one was two years old and the other was just born, we still have less than $10K in each account. So we are pinning our hopes on getting lots of scholarships. We also have a very small UTMA account for each ($250 each, which sank in value to $125 when the stock market tanked), given to them by their grandparents. I've told them that once they reach 7th grade, they must set half of everything they earn aside for college, which they will use for books, living expenses and incidentals. (My husband and I will try to handle tuition, room and board, supplemented by financial aid). The oldest child is now ready to do this. My problem is, how should she save? A savings account would be low-cost, but only earn pitiful interest. If she co-mingles the money with what we've saved in the 529 plan, we would retain more control over the money, and it would grow tax free until withdrawal, but then the college financial aid office would consider those funds in calculating financial our portion of tuition (whereas we want it to be separate for her to use on books, incidentals and expenses). Even worse would be if she put it into the UTMA: using UTMA to put college savings in your child's name can make it more difficult to finance higher education, because assets owned by the child (including any assets in a custodial account for the benefit of that child) count much more heavily than parental assets in determining how much financial aid the child qualifies for. The financial aid office would require require that we use 33% of those funds for tuition (as opposed to 6% on the 529 plan). She would also have the right to withdraw the funds from the UTMA (I'm not really worried about that; it's her money she's putting in, after all, and she wants to go to college. Besides, the UTMA we're in now is earning a really lousy return (it has lost half its value). We could open a new one, but Fidelity's, for example, requires that you start with $2500, which we don't have. She will be putting the money in with dribs and drabs, particularly to start, so I don't want anything that requires a set monthly amount contribution. Trying to weigh the tax consequences versus the financial aid consequences of the various options makes my head spin. What else? Savings bonds? A standard brokerage account? A checking account linked to an IMG account (savings, CDs and/or brokerage)? Suggestions? Other ideas? Help! Edited to add: My answer may be the Coverdell Education Savings account, set up through ShareBuilder. She would be limited to $2,000 a year, but I think that should be no problem. It's treated like the 529 for financial aid purposes, rather than an UTMA. I have to check whether ShareBuilder requires a fixed monthly contribution, but there is no minimum to set it up. Here is an excellent chart on the Fidelity website comparing the merits of the various options.