Your money and the quest for higher learning
By Edward R. Collins, AAMS, RFC

Are you saving for your kids’ college education? It’s a daunting task. The average cost of higher education has more than doubled in the past 20 years, and that’s after adjusting for inflation.

Many might be surprised to learn that the cost of a four-year Ivy League education might easily exceed $150,000 to $200,000. And as time goes by, these figures are only expected to increase.

Fortunately, for those who qualify, a great deal of help might come in the form of scholarships, grants, and government loans. However, many successful individuals will learn that their children and grandchildren will not qualify for these programs, at least not for much.

Qualification for these programs is heavily weighted on the income and net worth of the child’s parents. And even if they end up qualifying for government loans (typically the least stringent), the children of upper middle-class families might find the interest rates of these government loans to be set at higher levels than they would like.

These cold truths bring to light the need to begin planning for funding college education even if the children you are planning for are not yet born! A few tools are available to assist you in your planning process once you have decided to contribute toward a college savings plan.

STATE SPONSORED PLANS

Also known as Qualified State Tuition Programs (QSTs), Section 529 College Savings Plans offer great tax-incentives for college savings. If your personal situation is somewhat flexible, this type of plan may be the best option for you.

Each state has its own plan, and each plan has its own unique features. It is important to choose a plan with an investment strategy that fits your level of comfort with investment risk and your goals and objectives.

The major attraction of this type of savings plan is the preferential tax treatment it receives. Qualified distributions from the plan are free from federal income taxes. And while the money remains in the plan, it grows income-tax deferred.

A QST has other advantages, including:

A QST does have some possible drawbacks, however, including:

PREPAID TUITION PROGRAM

Section 529 Prepaid Tuition Programs are another option. They allow you to make contributions and lock-in current tuition rates at state institutions.

The advantages of this program are the same as the QSTs mentioned above, except they are generally limited to in-state residents and are also limited to in-state undergraduate expenses.

Another limitation is that you are locking in tuition at a particular institution. Therefore, you should only consider this option if you are reasonably sure which school your child or grandchild is going to attend.

EDUCATION SAVINGS ACCOUNTS

For 2005, you can contribute up to $2,000 per beneficiary, per year to a Coverdell Education Savings Accounts (ESA), which is an education IRA.

These ESA’s give you the ability to direct your own investments. Also, distributions are generally tax-free, and primary and secondary education expenses now qualify for distributions.

ESAs are not without limitations, including:

TWO MORE OPTIONS

Several other education options are available to you:

• U.S. Savings Bonds for College. Series EE and Series I bonds allow risk-averse taxpayers to avoid taxes on their college savings and earn a modest return on their investment.

However, the rules for Education and Savings Bonds are very exclusive. For detailed information, go to the government site at www.savingsbonds.com.

• UGMAs and UTMAs. These are custodial accounts that parents can establish for their children.

A major disadvantage of this method of saving is that the assets become the beneficiary’s at the child’s age of majority (either 18 or 21, depending on the state where it was established). Once a child is old enough, the assets are his or hers to do with as he or she pleases.

GENERAL TAX BENEFITS

You should be aware of a number of general tax benefits concerning saving for college.

• Student loan interest adjustment. Since 2002, all student loan interest qualifies as an adjustment to your adjusted gross income (previously allowed only for the first 60 months of payments).

The total adjustment is limited to $2,500 per year and is subject to phase-out. A dependent is not eligible to claim the adjustment.

• The new college tax deduction. An above-the-line adjustment of up to $4,000 is available for qualified higher education expenses for 2004 and 2005.

However, the maximum income limit to qualify for the deduction is $65,000 for single filers and $130,000 for married filing jointly.

• Hope and Lifetime Learning Credits. Visit the Web site of the National Association of Student Financial Aid Administrators (www.nasfaa.org) to learn more about these credits and other tax saving ideas.

SIDEBARS:
More strategies to save you money
Estate and gift tax benefits

Edward R. Collins, AAMS, RFC, is a family wealth-management specialist at Collins Wealth Management, LLC. He can be reached at 973-292-8728 (New Jersey) or 678-240-9445 (Georgia), or at www.collinswealthmanagement.com.