| How can you save for the cost of higher education? | | | | My preference is the 529 Plan as it provides greater |
| Here are some ideas that can help regardless of how | | | | flexibility in terms of who can fund the accounts and |
| close you are to that first tuition payment. | | | | the higher funding amount. The 529 Plans are offered |
| Based on the mathematics of compound interest, we | | | | by several low cost investment managers. Keep in |
| should start our college savings and retirement funds | | | | mind that a key element in increasing your investment |
| the day we start our first job. There are more than a | | | | returns is to keep fees and expenses to a minimum. |
| few obstacles in the way; food, shelter, paying off | | | | Once the children start their higher education you may |
| your own college loans and raising children. | | | | qualify for a few important tax breaks. Naturally they |
| The best approach is to start a plan as soon as | | | | are limited based on income. |
| possible. Part of the plan includes having a set amount | | | | There is the HOPE Credit. Individual tax payers are |
| deducted from your paycheck for the purpose of | | | | allowed to claim a credit against their Federal income |
| college funding. If you don't see it, you won't spend it | | | | taxes up to $1,650 in 2007 for the first two years of a |
| and a great place for your college fund is a 529 | | | | student's post-secondary education or certificate |
| College Savings Plan. | | | | program at an eligible institution. The student must also |
| The 529 College Savings Plan provides key | | | | be enrolled on at least a half-time basis. The credit |
| advantages in savings. First, the earnings are allowed | | | | amount and income limitations are indexed for inflation. |
| to accumulate tax-free. Second and more important, | | | | The HOPE Credit is on a per-student basis. If you |
| there is a 10% tax penalty on the earnings if the funds | | | | have more than one child in college even the IRS feels |
| are used for purposes other qualified expenses. I like | | | | sorry for you; however, the HOPE Credit is phased |
| the penalty for two reasons, it is more difficult to | | | | out for taxpayers with a modified adjusted gross |
| withdraw money when you have to pay a penalty and | | | | income between $40,000 and $50,000 ($80,000 and |
| even harder to tell the kids your new boat was once | | | | $100,000 for joint returns). |
| their college fund. | | | | The Lifetime Learning Credit is available to students |
| The 529 Plan can be funded with up to $60,000 per | | | | enrolled in an eligible education institute. Enrollment can |
| beneficiary per year, the beneficiary can be changed | | | | be less than half-time as long as the student is taking |
| and the account is controlled by the parents. For | | | | undergraduate or graduate classes to acquire or |
| financial aid purposes the account is considered an | | | | improve job skills. The Lifetime Learning Credit can be |
| asset of the parents and not the child which provides | | | | used to reduce your Federal income taxes by up to |
| a lower weighting in the financial aid process. I highly | | | | $2,000. The credit is based on 20% of the qualified |
| recommend that every parent and child research and | | | | tuition and fees paid during the year. The Lifetime |
| understand the financial aid process. | | | | Learning Credit is phased out using the same limits as |
| The 529 Plan is also an excellent estate planning | | | | the HOPE Credit. |
| option for the grandparents since they can use the | | | | The credits cannot be combined. You cannot use the |
| annual gift exclusion of $12,000 (in 2007) to fund a | | | | HOPE Credit and the Lifetime Learning Credit for the |
| non-taxable gift or can elect to fund up to $60,000 | | | | same child in the same year. You can use the HOPE |
| with a special five-year election. A couple can fund | | | | Credit for one child and the Lifetime Learning Credit for |
| twice these amounts. For most of us, an automatic | | | | different children in the same year. |
| deduction of a much lower amount is the most likely | | | | If you have eligible work-related educational expenses |
| mode of funding. | | | | and include the expenses in your itemized deductions |
| Other savings options include the use of the Coverdell | | | | you cannot use the Lifetime Learning Credit for those |
| Education Savings Account (ESA). Annual contributions | | | | expenses. |
| may not exceed $2,000 per beneficiary per year, the | | | | Student loan interest is another potential tax savings. |
| beneficiary must be under the age of eighteen and the | | | | Rather than being a tax credit, up to $2,500 student |
| taxpayer's ability to fund a Coverdell ESA is phased | | | | loan interest is deductible from taxable income. As with |
| out. Like the 529 Plan, the earnings are tax-deferred | | | | other deductions, this one is also subject to phase out. |
| and are not taxable if they are used for qualified | | | | If the tax aspects seem overwhelming, your tax |
| expenses. | | | | preparer or several of the tax software packages will |
| U.S. savings bonds issued after December 31, 1989 | | | | determine how to get the most from the various |
| may qualify for interest exclusion if they are in the | | | | credits and when the credits are phased out. |
| name of the purchaser who is over the age of 24 and | | | | My final recommendation is to get a jump start on |
| used to pay for the qualified higher educational | | | | saving by understanding your options, what is available |
| expenses of the taxpayer, their spouse or dependents. | | | | for tax benefits and to research the financial aid |
| The interest exclusion is phased out for at higher | | | | process. There are several excellent sources of |
| income levels. | | | | information on the financial aid process. I particularly like |
| Just to add another level of complexity, qualified | | | | the services of They have several inexpensive books |
| expenses for all three savings options are different as | | | | that will greatly help you understand both the |
| are the phase limits for the Coverdell ESA and the | | | | admissions and financial aid process. |
| interest exclusion on U.S. savings bonds. | | | | |