Paying For College-Part III

The average cost for tuition and fees at four-year public institutions has increased nearly 50% over the past 10 years after adjusting for inflation according to the College Board. The key to providing for your children’s college costs is to start saving early and systematically. Here are some of your best options:

529 Plans.  This is my favorite choice for saving for college because it allows you to invest a lot of money and you can invest using an array of mutual funds.  Here’s how it works: 

• You can contribute up to $60,000 ($120,000 for married couples) per child during any 5-year period.

• While your contributions are not deductible, your earnings grow tax deferred and withdrawals, when used for qualified education expenses, are tax free.

• You control the money.  In fact, if you don’t need the funds for your child’s education, you can withdraw the money.  You’ll pay income taxes on any profits plus a 10% federal penalty. 

• 529 saving plans can be used at virtually any accredited college or university in the US and even some foreign schools. 

Our research for our own clients suggests that the State of Utah plan is among the top rated 529 plans in the country. 

Independent 529 Plan for Private Schools. This is a prepaid tuition program for private schools which allows you to save money for college tuition by locking in the current tuition prices at the time of purchase and by offering a discount on tuition overall. Currently, the Independent 529 Plan is offer by over 270 private universities.  The big advantage of these plans is that the tuition is guaranteed by the member college no matter how much tuition rises or what happens in the investment markets. These plans only provide for tuition and does not provide for room and board or other college costs.

Prepaid Tuition Plans.  Pre-Paid Tuition Plans are offered by a number of states (including Alabama‘s PACT Plan) and allow you to pre-pay college expenses for basic in-state public school tuition and fees.  Your contributions can be made lump sum, over a period of years (5-years, for example) or until your child attains age 18.  If your child goes to a college out of state, most plans offer transfer tuition funding based on the average cost of tuition and fees in your state of residence. 

Coverdell Education Savings Accounts (ESA). You can contribute up to $2,000 per year (non-deductible) to a Coverdell ESA if your modified adjusted gross income is less than $110,000 single or $220,000 joint filer. Contributions to the Coverdell ESA grow tax free and distributions are tax free as long as they are used for qualified education expenses at an eligible institution.  The big advantage with these plans is that the money can be used for qualified elementary school and secondary education costs in addition to college costs.

Last month, the Alabama State Legislature passed a bill providing a state income tax deduction of up to $5,000 per year for contributions to Alabama‘s Prepaid Tuition Plan and 529 plan. Gov. Bob Riley said he would sign into law and if signed then the tax break will be retroactive to Jan. 1, 2008.

For more information on 529 plans or Pre-Paid Tuition plans, go to the Resource Center at www.welchgroup.com.