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Business // Thinking Smart
David S. Chang

Get Started On Saving For College

The cost of college has soared in recent years. With more than $1 trillion in outstanding student loans, it even has caught the attention of Congress, which recently passed a bill to keep interest rates low on federal student loans. The average full-time student at an in-state public university will pay about $15,000, and at a private university will pay on an average of more than $40,000! More than two-thirds of those receiving a bachelor’s degree will borrow money for college, with the average student leaving college with more than $23,000 in debt, 10 percent owing more than $54,000, and 3 percent owing more than $100,000.

Saving for college when kids are young can help defray some of these costs. The top three college savings plans are:

1) 529 Plan: A 529 Plan (named after Section 529 of the IRS Code) is an education savings plan run by a state or educational institution. Contributions are non-deductible, but earnings grow tax-deferred and distributions are tax-free as long as they are used for qualified educational purposes. The money in the plan is considered an asset of the owner (person putting money in), so it has lower impact on financial aid for the beneficiary (person using the money). Maximum investments are established by the respective plan with many more than $200,000 per beneficiary. Contributions are not limited by the income of the account owner.

2) Coverdell (Educational Savings Plan): A Coverdell or ESA is an education savings plan that can be opened at any participating financial firm. Like the 529 Plan, contributions are non-deductible but earnings grow tax-deferred and distributions are tax-free as long as they are used for qualified educational purposes. The money in the plan also is considered an asset of the owner, so it has lower impact on financial aid for the beneficiary. The biggest difference between a Coverdell and a 529 is that there is an annual limit of $2,000 per beneficiary, and contributions are limited by the income of the account owner of $220,000 for a couple and $110,000 for a single owner.

3) Custodial Accounts: A custodial account is owned by the beneficiary and managed by the owner until the beneficiary reaches a certain age. Two account types are Uniform Gift Minor’s Act and Uniform Trust Minor’s Act. Part of the earnings may be exempt for taxes with the remaining taxed at the beneficiary’s rate. There is no limit to the amount of money contributed, but the $13,000 gift tax per person may apply. Because the assets belong to the beneficiary, it will have a higher impact on financial aid formulas. One of the benefits is that the beneficiary can use the money for anything, and withdrawals can be made at any time.

For more information on these plans, see a financial adviser or college savings professional. One key thing to note is that your retirement plan should always take precedence over a college savings plan. While your children can borrow for college, you cannot borrow for retirement. So once your retirement plan is set, you can start saving for college!

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