My brother just asked me this question: he currently has a son that is three years old. What are some ways to save for his son's education? What are the pros and cons of each way? How much should he be contributing to his son's education? Any other advice?
He should definitely look into a 529 plan. Each state offers one. These provide tax incentives. Other relatives can contribute.
A downside is if your nephew does not end up going to college, there will be a pentalty for withdrawing the money for other purposes (as there would be for withdrawing from a 401K early).
Look into the Coverdell Education Savings Account (ESA).
This is like a Roth IRA for higher education expenses. Withdrawals are tax free when used for qualified expenses. Contributions are capped at $2000/year per beneficiary (not per account) so it works well for young kids, and not so well for kids about to go to College.
This program (like all tax law) are prone to changes due to action (or inaction) in the US Congress. Currently, some of the benefits are set to sunset in 2010 though they are expected to be renewed in some form by Congress this year.
In today's dollars, cost including room and board can total $20K - $60K/yr depending on the school. With college 15 years away, these numbers can double by then. And the annual savings required, adjusted accordingly. If we look at the low end, we're still at $40k/yr or $160k total, and it would be prudent to start saving $10k/yr if possible. It's easy enough to drop the number if 5 years in, you see college costs dropping or rising less quickly.
I have children. I’m not saving a dime for their college tuition. With the exception of some technical degrees, I think college is not a great source of education.
When I reflect on where I obtained the most knowledge I come up with two major sources: work and my own self education. I have a Master’s degree but working has, by far, taught me more than any school system. That includes bagging groceries, baling hay, painting, factory work, engineering, and programming. Doing something, working with others, making mistakes, and then learning from those mistakes educates more than listening to someone preach in a classroom. My own interest in history and economics has also expanded my knowledge more than any classroom.
If my children learn anything from me I hope it is this: think. Watch, listen, read, and then think. Think for yourself. Don’t let others think for you. I believe there would be a lot less heavily indebted college graduates if they would have thought for themselves instead of having others think for them.
Soapbox = off.