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An
Introduction to College Savings Plans
The use of an appropriate savings plan can at
least soften the blow of financing
a college education.
The steady rise in the
cost of attending college may have become one of those few
absolute certainties
in life, along with death and taxes. Tuition
and fees for public and private institutions alike can seem overwhelming, especially if
parents have done little financial
preparation ahead of time. Some solace
can be taken in the fact that there is a wide variety of approaches for
saving
for college. For parents who have some
foresight, the use of a plan that is tailored to their circumstances
can at
least soften the blow of financing a college education.
A prepaid tuition plan
makes the most sense for families that are reasonably certain that
their child
will attend one of the schools in a state’s plan, and that are
satisfied with a
rate of return that equals the inflation rate for the costs of schools
in the
plan. Under prepaid tuition plans, you
are buying future tuition at a state’s public colleges at today’s
prices. On
the downside, payouts from these plans reduce eligibility for
financial aid on
a dollar-for-dollar basis. In addition, states dealing with especially
tight
budgets have been raising the costs of participating, and in some
cases have
been temporarily closing off enrollment.
For a group of
approximately 250 private colleges, there are independent 529 plans. They work like state prepaid plans, including
the dollar-for-dollar reduction in financial aid eligibility when funds
are
distributed. Money from such a plan can
be rolled over to a state 529 savings plan or a state prepaid plan
without
penalty
.
Coverdell
Education
Savings Accounts
If
you want the most variety
in investment options and lower fees, a
Coverdell account may make sense. Joint income tax filers with adjusted
gross
incomes of up to $220,000 can save up to $2,000 a year, tax-free, for
education
expenses. No plan is without its weaknesses, and for the Coverdell
accounts it
is the adverse effect on financial aid eligibility because the
accounts are in
the student’s name, not the parents’ names.
Custodial
Accounts
A custodial account is
appropriate for those who want to transfer
assets, including securities, to a young beneficiary in order to
reduce taxes.
However, be forewarned that the beneficiary will have control
over the
account upon reaching the age of majority. Funds can be taken from the
account
at any time and for any purpose benefiting the child, not just
educational expenses.
Withdrawals are taxed at the child’s rate.
Savings Bonds
If the 529 plans are the showhorses of
financing in higher education,
savings bonds are the workhorses. Returns on savings bonds are
usually modest,
but the investment could not be safer. Savings bonds may be especially
attractive
to middle- and low-income households that fall within certain
income
restrictions. For Series EE bonds issued after 1989, and all Series I
bonds, at
least some of the interest earned on the bonds is tax-free if used for
higher
education expenses.
These
approaches to
saving for college are not exhaustive, and the descriptions
here only scratch the surface. Professional advice can help a
family craft a
plan that is best suited to its needs and priorities.
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