Saving with Stock Mutual Funds

I have an eight-year-old daughter and I would like to start planning for her college education.

Should I invest in: 1) a pre-paid college plan; or 2) a state-college plan; or 3) invest in a mutual fund. What are the pro and cons for each plan?


Bruce Hammond

Bruce Hammond is an expert on college prep, applications and cost, and author of Discounts and Deals at the Nation's 360 Best Colleges and... Read more

With 10 years until college, an instrument that places the money in stock mutual funds is the best bet. (You might want to keep a fraction in interest bearing assets, but not more than about 25 percent at this point.) That rules out pre-paid plans because they give you only the rate of increase of tuition plus a tax benefit.

This year, tuition will increase nationally by about four percent. You can do way better than that in the market, tax break or no. The most interesting state plans to emerge are the new 529 or savings trust accounts. Fidelity manages some of them and Fidelity Investments: Planning: College Planning has information that might be of interest. This vehicle is clearly superior to the Education IRA -- 529 accounts offer higher deposit limits and don't prevent families from collecting the Hope Scholarship tax credit (as does, unfortunately, the Education IRA).

One other instrument you might consider is the Roth IRA -- money from there is available penalty-free to pay for education and IRA funds are not included when your assets are calculated by the need-based aid formula.

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