Saving for a child’s education has always been a daunting feat for parents. The benefits of a third level education are indisputable but parents and students are all too aware of the financial strain four years of college generates. For parents attempting to save in this economic climate the task can be overwhelming.

Student-loan provider Sallie Mae released a Gallup survey in May that shows 47% of parents are saving less or not saving at all for their children’s education. According to Stacey L. Bradford of The Wall Street Journal “While not saving for that degree may have felt like a smart move while the stock market was crashing, the need to fund your kid’s college account has only grown. For the 2008-2009 school year, the average cost of attending a four-year public school for in-state residents — including tuition and room and board — rose 5.7% to $14,333, according to the College Board. The cost was up 5.6% to $34,132 for a private university.”

For those who choose to save for college Bradford examines the most popular plans of savings:

529 Prepaid/College Saving Plans.

Joesph Hurley of savingforcollege.com describes 529 plans as a means of “fortifying your college funding war chest, or at least making plans to do so.”

Bradford describes how, provided the money is used for education expenses, parents can withdraw from a 529 saving plan without paying tax. She says: “Each year, one parent can contribute $13,000 or the two together can put in $26,000. You also can invest $65,000 or $130,000 for two parents, at one time, provided you don’t make another contribution for five years.” 529 accounts vary between states but most offer a guaranteed option that cannot drop below a 3% interest rate. This means that 529 savings accounts are stable investments that are not subject to tax.

Bradford examines prepaid 529 plans that some states offer. They allow: “parents to lock in today’s tuition prices for participating state schools. These are usually open only to state residents.” Bradford describes how 529’s are not immune to risks, but offer some compensation for investors “Some states have fallen on hard times and may not be able to stand behind their tuition guarantees. In Alabama, parents can roll over money into the state’s Higher Education 529 Plan to avoid tax penalties or they can redeem their original contract payments, minus fees. If Florida terminates its plan, it will provide tuition for participants who are within five years of college.’

UGMA and UTMA Accounts

Bradford writes: “Through the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA), a child can own securities and other investments in his or her own name, provided a parent or another adult acts as a custodian on the account.

The risks: These accounts no longer are the tax haven they once were. Investment income used to get taxed at a child’s low rate, under the so-called kiddie tax. Now, a child’s unearned investment income above $1,900 is taxed at the parents’ higher income bracket until the child reaches age 19 (or 24 if the child is a full-time student).”

The advocates of college investment schemes claim that it is irresponsible not to save for your child’s future. With these plans they hope to secure investments and reduce the risks associated with savings; however opponents of such long term savings still exist.

Writing on msn.com Sally Herigstad offers 6 reasons not to save for college. She claims that it is fiscally reckless to invest such large amounts of money in such a tumultuous market. Some of her points are:

Students should invest in their own education

Herigstad claims that parents who simply pay their children’s way do not instill any value of money. She says: “Every year a number of freshmen trek off to college on their parents’ hard-saved money, only to spend more time the first few semesters partying than studying. Would they crack the books more if they were paying the bill? Even the most responsible kids seem to do better in college when they help pay for it.” Herigstad suggests supporting the student to an extent, but encouraging them to pay the majority of their tuition will deter the student from dropping out.

Scholarships and grants are also an alternative route. Students who pursue scholarships will dedicate more to their academic performance both in high school and in college. Student loan company Nelnet found that scholarships are increasing, with minor reductions made in the value: “the number of scholarships rose to 1.7 million in 2008, from 1.4 million a year earlier, the average amount awarded fell nearly 7 percent, to $4,300 from $4,607.”

Education funds are not always the best way

Herigstad claims that despite college saving institutions attempts to reduce the risk of their plans they have major drawbacks such as:

• “Limited investment options. Many education funds pay only interest; others let you invest in the stock market. You can’t use the typical education fund to invest directly in real estate or start a small business, for example. Compare the rate of return you expect with what you could receive in alternate investments.
• Difficulty predicting future tax benefits. Tax rules change and it’s hard to predict future income levels. Sometimes by the time kids reach college age, their parents’ income level is too high for certain tax advantages they’d been counting on.
• Financial aid considerations. Students are expected to contribute a higher percentage of their savings to their college education than their parents, so placing money in your child’s name may hurt their chances of getting financial aid. You may be better off keeping the money in your name.”
College doesn’t have to cost as much as we’re told

Herigstad suggest that the best education is not necessarily the most expensive. She claims that parents should not base their savings on the higher bracket of tuition fees, but have more realistic goals and save accordingly. She says: “Students can start at a community college at relatively low cost. In California, for example, the annual cost for tuition, books and supplies at a community college is slightly more than $2,000. After two years, students can transfer to a four-year College and graduate with the same degree as students who started there.”

With student debt increasing and the economic climate stagnant questions have been raised as to whether making such a long term financial commitment is tenable. The exorbitant costs associated with college have dissuaded both parents and students who simply cannot afford the cost or cannot take the risk of losing their money in the event of another crash. Parents who invest in college also run the risk of forgoing retirement savings.

In this Bear market the value of college specific saving accounts dropped 21%. Stocks and investment bonds are subject to market fluctuations and can be unreliable when saving for a child’s future. Similarly, many parents feel uncomfortable depending solely on bank accounts. Most parents firmly believe in starting a college fund when their child is very young, or before they are even born. However in the current economic climate this practice is being called into question. Should students expect their parents to fund their education or should they take responsibility for their own future? What do you think?