Chris Farrell: Tax-free savings plan may not be family's best bet for college fund

Most parents and their children see a college degree as a passport to better earnings and more employment over a lifetime. They're right. Employers want educated workers. College graduates are more likely to get jobs with health insurance and an employer-sponsored pension. The median college graduate currently earns about $16,000 more than the median peer who stopped education at high-school. For many people, it's the best investment they'll ever make.

It's also their most expensive investment. Tuition and fees average about $6,600 a year for an in-state public four-year university, $17,500 for an out-of-state public university and $25,000 for a private four-year college, according to the College Board.

These figures don't include room and board and lost wages. Add those costs in and for the price of a college diploma you can buy a nice home in most parts of the country. Still, while the Great Recession has been brutal on most workers, those without a college degree have been hit especially hard. Having a college degree does not necessarily reward you, but those who don't have a degree are relentlessly punished in this economy.

That's why it's smart for parents to save for their children's college education. The earlier you start, the more money you'll accumulate and the less you will need to borrow. There are a number of tax-advantaged ways to save for college. The best product is state-sponsored 529 college savings plans. They offer tax-free withdrawal for qualified educational expenses.

But I want to suggest a different strategy for many parents. My problem is that saving for college and the 529 have become synonymous. The 529 is great, but to take advantage of its tax-free withdrawals the money has to go toward qualified educational expenses. If it isn't, you'll pay a penalty and income taxes on withdrawals.

That's why for many people I would consider putting money into a 529 low on your list of savings priorities. With many families dealing with uncertain incomes and limited resources, the critical task is to build overall household savings, money that can be tapped penalty-free for any reason. This is your safety net for troubled times. It's also your opportunity money, savings that let you participate in an intriguing investment or shift into a more satisfying career.

Here's the thing: You can always tap those savings to help defray the cost of college. With this perspective, college savings becomes part of an automatic long-term savings program you set up. Some of your savings could go regularly into savings accounts, certificates of deposit, Treasury bills and similar safe investments. Some of the money might be automatically invested in a broad-based stock index fund, such as the Wilshire 5000 or Standard & Poor's 500. You could add the government's default-free tax-deferred inflation-protected savings bonds to the fixed income portion of your portfolio. This mix of secure and riskier savings can be tapped penalty-free to pay for everything from career changes to medical emergencies to, yes, college tuition bills.

So, by all means save for college by putting some money in a 529 plan, especially if you're already funding your retirement plan to the maximum and have ample savings for emergencies. But if you're struggling to save more and borrow less -- as many people are doing today -- I'd put the emphasis on building up household savings for the long haul.

Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org.