John W. Schoen Senior Producer • Profile • E-mail

When it comes to saving for college, there's no shortage of advice from friends, family and investments advisors. J.T. in New Jersey is looking into a so-called 529 accounts, but is worried it might hurt his child's chances of qualifying for financial aid. That's just one of the many angles he'll have to consider.

I am considering putting money in a 529 account to pay for my son's education 18 years from now. Will any of this amount affect my son's ability to receive "free money" in the form of scholarships and grants? Is it more beneficial to have a 529 pay for the education or to have scholarships/grants pay?
J.T. -- Edison, NJ

Well, it’s always better to cover college costs with grants and scholarships -- because it’s someone else’s money. So-called 529 accounts offer some advantages -- especially tax breaks that let your savings grow faster. But they're by no means the only way. For an overview of what's out there, check out our recent story on the subject.

One of the downsides of 529s is that they come in so many flavors, they can be confusing -- which prompts many people to turn to a "pro" for advice. (In many states, you can apply directly and cut out the middle man if you like. And, in general, the plan offered by your state is the cheapest way to go.)

If you do get advice from a broker or financial planner, be clear on how they’re paid. Many get commissions from the investment managers of these plans, and some advisors will steer you to a plan that's good for them, but not necessarily good for you.  Last year, the National Association of Securities Dealers issued an “investor alert,” warning that some brokers were recommending out-of-state plans even though their clients could have found lower fees with an in-state plan.

One other caution: The tax breaks you get from a 529 plan are currently set to expire in 2010. Unless Congress makes them permanent, there is a risk that 529 withdrawals after 2010 could be taxable.

No matter how you set up your savings, you do need to think about the impact it will have on your taxes and your prospects for getting financial aid. Under the current rules, some forms of college savings will be considered part of your assets and some won’t. So you also may want to consider putting some of the savings in your child’s name.

And keep in mind that there’s a lot of scholarship money out there that is not tied to financial need. Some of it is handed out by schools to attract top students, and some is offered by civic organizations and other groups based on academic achievement or winning essays.

Saving for college has a lot of variables attached to it that are almost as tough to forecast as the size of a tuition bill in 18 years. A lot can happen between now and then to your personal finances, the tax code and the formula for granting aid. And you really have no way of knowing  how much scholarship or grant money will be available until your child applies. But don’t let that discourage you from getting started. By doing so, you’ll be way ahead of most other parents. 

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