Monday, November 14, 2005
Tax-free College Savings Plans: Financing a College Education
Cost of an Education
It is natural that we want the best education for our children. The cost of college, even public state colleges, is higher than you might realize. According to the College Board, if your child is 10 years old in 2002, you can expect the cost of four years of a public college to be about $145,000, or $260,000 at a good private school.
If you have more than one child, the potential costs are truly staggering. Sure, grants, scholarships, and student loans help, but if you plan carefully and start a sensible investment plan early, you and your children will enjoy the benefits of tax-free earnings covering most of their education costs. We'll cover traditional college financial aid (and there is a lot to be taken advantage of) in a few moments.
The Golden Piggy Bank covers all the proven ways to give your children a totally secure and successful future.
Children sure are expensive. Here we are talking about zillions of dollars for college, and we are already spending a bundle for the children's every day expenses.
Fortunately, there are some wonderful ways to pay for your children's education. There are two tax-free ways to save for college
Coverdell Savings Plans (Coverdell IRA Education Plan)
www.savingforcollege.com/coverdell/ all the rules
State-sponsored 529 plans
www.savingforcollege.com/compare/ 529 evaluator
Coverdell Education Savings Plans
formerly called Education IRA or Education Savings Accounts
Parents or the child can contribute up to $2,000 a year, as long as the parent's adjusted gross income is less than $180,000. If between $180,000 and $220,000 the allowable contribution is less. Single adults with incomes less than $95,000 a year can also take advantage of this tax-free investment to save for their own education.
Money saved in a Coverdell Plan can be used to pay for tuition at any school, including private elementary and high schools, and for expenses such as uniforms, transportation, computer and software, and extended daycare.
These college savings/investment plans can be set up with any financial services firm. The person who contributes to the account controls it deciding how and when the money is spent. If need be, the savings may be transferred to another family member. Note though that the money is considered to be the child's, which may make it harder to qualify for grants and scholarships.
Section 529 Plans
First offered in 1996 as "Qualified Savings Tuition Plans", they are now commonly called "529" which was the section of the law that created the plans. These savings plans allow parents, relatives, or friends to invest in a child's education, and each can contribute up to $10,000 ($20,000 from a couple) per year with a maximum of $100,000 to $250,000 per account. The money goes into state-sponsored managed accounts, with a mix of stocks and bonds.
You may select to invest with any state's 529 plan, and the money can be used at any college in the country. If your state has no 529 plan, or if you prefer the one offered by another state, you may take advantage of another state's plan.
If the child doesn't go to college, the money can go to another family member for education expense. If the money isn't used for a college education (tuition, room & board, books, fees, supplies, computer), you pay a 10% penalty and taxes. There are no income or age limits. If you find that you don't like your current plan and have held it for at least one year, you can switch to another.
One type of 529 plan offered by some states is a "prepaid tuition plan". Don't go for it. Since you are locked into one school or state school system, it is too restrictive.
The person who initially funds the plan controls it. Since the assets of the plan are considered to be the parents, it is easier for the student to qualify for additional financial aid as long as the income from the plan (considered to be the child's) is a modest amount.
The only negative thing I see with a 529 plan is that you have little control over the investments since you must choose among the options offered, which usually give you 4 to 7 choices.
Help from your college's financial aid office
Your child is interested in college. You don't have savings earmarked for education. Sure, the local community college is affordable, but your child wants to go to a better school. Where will the money come from?
The college financial aid office will give you an application called the Free Application for Student Aid. A determination will be made of what portion you and your child must contribute, called the Expected Family Contribution (EFC). You should apply for aid before March of the year prior to the next school year, applying for aid at all the schools your child is interested in.
By April or May you will receive award letters detailing grants and loans that your child qualifies for. The best are federal Pell grants or Supplemental Education grants, since they don't have to be repaid. Stafford loans and Perkins loans will help, but loans should be avoided if possible.
Sallie Mae®, which funds student loans, has a website www.wiredscholar.com with an excellent calculator that will analyze financial aid packages and the expected family contribution. They also have a calculator that will estimate what the loan payment will be after your child graduates. Take a look at their helpful glossary of higher education terms.
A good place to look for scholarships is at www.finaid.org
There are also tuition payment plans, called PLUS loans, available from Academic Management Services (800-635-0120 and www.amsweb.com). PLUS loans are also available to cover all expenses not covered by other aid. However, parents are responsible for repayment of a PLUS loan, not the child. These loans are not based on the family's economic need.
It is natural that we want the best education for our children. The cost of college, even public state colleges, is higher than you might realize. According to the College Board, if your child is 10 years old in 2002, you can expect the cost of four years of a public college to be about $145,000, or $260,000 at a good private school.
If you have more than one child, the potential costs are truly staggering. Sure, grants, scholarships, and student loans help, but if you plan carefully and start a sensible investment plan early, you and your children will enjoy the benefits of tax-free earnings covering most of their education costs. We'll cover traditional college financial aid (and there is a lot to be taken advantage of) in a few moments.
The Golden Piggy Bank covers all the proven ways to give your children a totally secure and successful future.
Children sure are expensive. Here we are talking about zillions of dollars for college, and we are already spending a bundle for the children's every day expenses.
Fortunately, there are some wonderful ways to pay for your children's education. There are two tax-free ways to save for college
Coverdell Savings Plans (Coverdell IRA Education Plan)
www.savingforcollege.com/coverdell/ all the rules
State-sponsored 529 plans
www.savingforcollege.com/compare/ 529 evaluator
Coverdell Education Savings Plans
formerly called Education IRA or Education Savings Accounts
Parents or the child can contribute up to $2,000 a year, as long as the parent's adjusted gross income is less than $180,000. If between $180,000 and $220,000 the allowable contribution is less. Single adults with incomes less than $95,000 a year can also take advantage of this tax-free investment to save for their own education.
Money saved in a Coverdell Plan can be used to pay for tuition at any school, including private elementary and high schools, and for expenses such as uniforms, transportation, computer and software, and extended daycare.
These college savings/investment plans can be set up with any financial services firm. The person who contributes to the account controls it deciding how and when the money is spent. If need be, the savings may be transferred to another family member. Note though that the money is considered to be the child's, which may make it harder to qualify for grants and scholarships.
Section 529 Plans
First offered in 1996 as "Qualified Savings Tuition Plans", they are now commonly called "529" which was the section of the law that created the plans. These savings plans allow parents, relatives, or friends to invest in a child's education, and each can contribute up to $10,000 ($20,000 from a couple) per year with a maximum of $100,000 to $250,000 per account. The money goes into state-sponsored managed accounts, with a mix of stocks and bonds.
You may select to invest with any state's 529 plan, and the money can be used at any college in the country. If your state has no 529 plan, or if you prefer the one offered by another state, you may take advantage of another state's plan.
If the child doesn't go to college, the money can go to another family member for education expense. If the money isn't used for a college education (tuition, room & board, books, fees, supplies, computer), you pay a 10% penalty and taxes. There are no income or age limits. If you find that you don't like your current plan and have held it for at least one year, you can switch to another.
One type of 529 plan offered by some states is a "prepaid tuition plan". Don't go for it. Since you are locked into one school or state school system, it is too restrictive.
The person who initially funds the plan controls it. Since the assets of the plan are considered to be the parents, it is easier for the student to qualify for additional financial aid as long as the income from the plan (considered to be the child's) is a modest amount.
The only negative thing I see with a 529 plan is that you have little control over the investments since you must choose among the options offered, which usually give you 4 to 7 choices.
Help from your college's financial aid office
Your child is interested in college. You don't have savings earmarked for education. Sure, the local community college is affordable, but your child wants to go to a better school. Where will the money come from?
The college financial aid office will give you an application called the Free Application for Student Aid. A determination will be made of what portion you and your child must contribute, called the Expected Family Contribution (EFC). You should apply for aid before March of the year prior to the next school year, applying for aid at all the schools your child is interested in.
By April or May you will receive award letters detailing grants and loans that your child qualifies for. The best are federal Pell grants or Supplemental Education grants, since they don't have to be repaid. Stafford loans and Perkins loans will help, but loans should be avoided if possible.
Sallie Mae®, which funds student loans, has a website www.wiredscholar.com with an excellent calculator that will analyze financial aid packages and the expected family contribution. They also have a calculator that will estimate what the loan payment will be after your child graduates. Take a look at their helpful glossary of higher education terms.
A good place to look for scholarships is at www.finaid.org
There are also tuition payment plans, called PLUS loans, available from Academic Management Services (800-635-0120 and www.amsweb.com). PLUS loans are also available to cover all expenses not covered by other aid. However, parents are responsible for repayment of a PLUS loan, not the child. These loans are not based on the family's economic need.
# posted by ADMIN : Monday, November 14, 2005
