I remember how proud my mother was when I got into Harvard. Most of the content of that article is still applicable, but one thing that has changed is that I have a new favorite state 529 program.
Before getting into that, let me summarize some key points about saving for your kids:
(1) You come first. Make sure your retirement accounts are funded to the extent possible before saving for college. Not only do you not do your kids any favors if they have to worry about you during your later years, but college loans are virtually always available at very low rates (retirement loans are harder to come by: when were you planning to pay them back?).
(2) Investments that don't grow AREN'T safe. Don't be so concerned about the volatility of equity investments that you end up choosing "safer" investment vehicles. Over reasonable periods of time, equity investments virtually always do much, much better (and, once again, you can always borrow the rest if I'm wrong). Until your child is a teenager, and possibly even then, you should be thinking equities.
(3) Don't make this an all-or-nothing affair. There are plenty of studies that can scare the heck out of you about college costs, and give you the urge to put the whole matter out of your head. Relax, save what seems reasonable, invest wisely, and whatever gap remains will be manageable (did I mention that low-interest loans for college are easily available?).
In the aforementioned Harvard article, I suggested my fondness for the Missouri 529 plan, and I still like it a great deal. I also still believe you should take a look at the current information about your own state's plan at Joe Hurley's wonderful site, since some of them offer special benefits for their residents and others punish people who use out-of-state plans.
But my new best friend is Nevada. They offer a plan through Vanguard that allows you to do a better job of diversification than any other plan I've seen: if you choose to go with an all-equity approach, you can put 50% into the Total Stock Market Index Portfolio (which essentially owns the entire U.S. stock market) and 50% into the Total International Stock Index Portfolio (which doesn't quite own the rest of the world but gets much, much closer than most other funds). If you are starting to reduce the volatility of the investments for your teenager, you might divert 30% to the Inflation-Protected Securities Portfolio (which buys U.S. treasuries that guarantee a return above the rate of inflation). There are other low-cost portfolios available, and you can allocate among up to 5 of them.
In addition to the ability to diversify so thoroughly, their costs are admirably low. And for people who ever buy groceries, gas, or food, Nevada participates in the Upromise program, so purchases of many products and services can result in automatic additions to the plan. You wouldn't be the first parent to eat a lot at McDonald's so that your kid can go to college.
The one downside to the Vanguard Nevada program is that the first deposit has to be for at least $3,000 (subsequent investments can be as little as $50). If that is too steep to start, you might want to consider either the aforementioned Missouri plan or the Vanguard Iowa program (which has a slightly lower annual expense ratio than Missouri), both of which also participate in Upromise, and allow you to open an account with just $25 (but don't offer the same investment choices or allocation flexibility as the Nevada plan). And you can roll into the Nevada plan later once you meet their minimum.
By the way, there are several lousy state plans with awful investment choices, ridiculous restrictions, and/or high expenses. These crummy plans shall go nameless, because I might run for President of the United States someday, and I don't want to lose the potential endorsement from political leaders in Phoenix or Cheyenne. Also, some states have both great and not-so-great plans available, and you want to choose the right one. Finally, make sure you don't confuse college savings plans with less desirable prepaid tuition plans. Do your homework: this is a decision that will have a MAJOR impact on the life of your family.
