A college education can be expensive which is why it is important to begin a college savings fund early. However, one cannot simply throw money into a savings account or other investment account as the income tax on the income generated by the plan will drastically reduce the growth potential of the plan resulting in the parent to have to put aside more of their own money into the plan to achieve the needed funds for their child's education. In previous Hubs I have discussed how to use so called 529B College Savings accounts and life insurance as vehicles to build tax free savings for a child's education. In addition to the 529 B accounts, the IRS also allows tax free accumulation of investment income in Coverdell Educational Savings Accounts (ESAs). Other types of accounts such as savings or investment accounts opened in the child's name under the Uniform Gift to Minors Act (UGMA) can also offer some tax advantages.

However, tax savings is just one critical feature of a college savings plan with two additional ones being keeping your options for the funds flexible and maintaining control over the money. Each of these three features are important but are not the same with all types of college savings plans.

When saving for a baby's or young child's future college education, you will be building up a large fund over time which means that in later years the income from the invested funds will start to become substantial and this can be a serious tax problem. If you leave the income in the account to grow, which is the smart thing to do from a financial and investment point of view, you will have to dip into other income to pay the taxes due on the investment income. Using life insurance, a 529B plan or other approved account vehicle that exempts the income generated by the investment from taxes so long as the funds are used for approved educational expenses allows you to get maximum benefit from the investment as well as not incur and additional tax burden.

Similarly, flexibility and control are also important. What if the child decides not to go to college? If you have used a tax sheltered vehicle you could end up with a large tax liability if the funds are used for something else. While there are other vehicles which are flexible and tax sheltered (such as an account in the child's name and which the income is either not taxed or taxed at a very low rate if the child has no other income while growing up) but require that you surrender control of the money to the child. Imagine how you would feel if you work and save enough to send you child to Harvard and he or she decides to try their luck in Las Vegas with the money instead. Both life insurance and 529B plans allow you to retain control as well as provide you some alternatives in the event the child either elects not to go to college or decides to attend a less expensive school and not spend the entire amount saved.

Like any long term investment, saving for a child's college education requires careful planning and management if your goals are to be reached and external costs, like taxes, kept to a minimum.