Which bank should I use to save for college?

While everyone's circumstances are different, in many cases, the best way to save for college, especially if one's kids are fairly young, is through a 529 plan.  529s are tax-advantaged savings plans offered by each state.


With a 529 plan, your investments grow tax-free.  You put in after-tax money (meaning you do not get a tax deduction for putting the money in -- if you're familiar with IRAs, it's more like a Roth IRA rather than a deductible traditional IRA) and when the money is ultimately spent for your kids college expenses, it comes out with no taxes due on the growth of the investments.  They're also a fabulous tool for grandparents to use to get assets out of their estates yet retain some control over those assets.

Note that the investments may be as aggressive (ie. all stocks) or as conservative (ie. all money-market or equivalent) as you like in most plans.  Many plans offer age-based portfolios which get more conservative as the child approaches college age.

A few states offer state-specific tax benefits for using the plans sponsored by those states, but those benefits are usually fairly small, if offered at all.  In the long run, it's probably most important to have a well-run plan with a good selection of investment plans and low expenses.  Remember - expenses eat into your return every single year.


If you have a fee-only financial advisor and/or a tax advisor or accountant, we urge you to talk with him or her about these plans as an option.  One word of caution, though, many so-called "financial advisors" are brokers who will sell you more expensive products.  Most of the state's 529 plans come in two flavors -- a "direct purchase" version and a "advisor" version -- the latter meaning "sold by a broker".  In general, we strongly urge folks to avoid the broker-sold products which usually don't add any value but just cost a lot more.

Or, better, before talking to any advisor (fee-only or otherwise!) - investigate some of the resources on the internet regarding these programs.

< http://www.savingforcollege.com/>  is a great site (run by Bankrate.com) which talks about general issues regarding saving for college as well as holding vast amounts of useful information about the various plans out there.

That all said, you'll notice we didn't really answer the original question because it's not necessarily the right question to ask.  Should you use a bank to save for college?  The answer, if you're talking about long-term savings starting when your kid is young, is almost certainly "no".  Banks are great for handling cash - for checking accounts, savings accounts (where you put short-term money - not money you expect to grow), emergency savings, etc.  If your child is starting college next year, then the money is short-term money and a bank (or perhaps a money market mutual fund) may be the right choice.  But if you're starting while your child is young, a bank is probably not the place to go.  Even if you are very very conservative and only want to save for college in cash-like vehicles, a 529 may still make sense.  Talk to your advisor.

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