Investment Calculator | Guides Parents Through The Business College Savings Plans

According to a survey by the New York-based College Board, college tuition costs are rising faster than the rate of inflation. Between 1993 and 2003, for example, the average cost of tuition and fees for four years increased by 47 percent in public universities and 42 percent in private institutions.

Therefore, parents should start saving for college as soon as possible, says Stuart Ritter, certified financial planner at T. Rowe Price, the investment management and the Baltimore-based mutual fund company. One way, he says, is to take advantage of state-sponsored 529 college savings plans.

These plans are becoming increasingly popular as a way to save for college, as they provide some of the best tax benefits available, including an exemption from federal taxes on withdrawals for qualified education expenses, and have high contribution limits to help save for college.

As a result, a 529 plan can potentially provide more money to spend on education than other investment products such as liability accounts and uniform gifts minor act (UGMA) accounts, an alternative way to contribute assets to a minor for purposes of investment, says Ritter. An individual or family can usually contribute more than $ 200,000 total in a 529 plan.

Currently, all states offer some type of 529 plan, half of the incentives offered to state residents. So while it may be practical for some parents turn first to their home states when considering a plan, families are not limited to their own states' plans. "You could pay to shop around," Ritter says, adding that besides looking at the potential benefits of state taxes on their contributions, parents also should evaluate the costs, expenses and investments.

Another tool, the College Savings Calculator comparison, comparing college savings in a 529 plan to do in a UGMA account.

One caveat is that due to provisions in the tax laws, the federal tax exemption for educational expenses expires in 2010 unless extended by Congress. After that, income is considered income to the beneficiary - usually still beneficial, since most of the 18 years of age are at a low level of taxation. In addition, earnings on a distribution not used for qualified expenses may be subject to income tax and a penalty of 10 percent federal.

Sorting through the matrix of 529 plans can be overwhelming, but experts say it's important for parents who are hoping to get the most out of their savings.