Tax Law Advisors - Managing College Finances: Articles, Tools & Resources You Can't Afford To Miss!

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With all the other expenses competing for your monthly income - mortgage, car payment, 401(k) plan contribution, and the like - carving out a small sum of money to save every month for college isn't easy. However, the earlier you start the more you're likely to accumulate.

Let's compare two hypothetical examples. The Smiths and Jones both want to send their children to a college whose four-year total cost is approximately $40,000. The Smiths start saving as soon as Junior is born, putting away $100 per month earning 8% per year. By the time Junior is ready for college, they will have saved $48,749 - more than enough to cover the entire cost plus account for inflation.

The Jones, however, wait until Precious is 10 years of age before starting to save. Even though they can put away $250 per month, when Precious is ready for college eight years later they have only saved $34,163 - meaning they'll have to make up any shortfalls out of pocket.

Of course, these hypothetical examples are for illustration purposes only and do not represent the return of any specific investment. Also, taxes, fees, and other costs are not considered. But the message is clear: The earlier you start, the less you'll need to save each month and the more you're likely to end up with by the time you send your child or children off to State U.

Fortunately, several savings and investment strategies exist to help you accumulate assets for college.

College Funding Ideas

1. Assess your needs. To determine how much to save, you need to estimate the future cost of tuition at public and private institutions. With education cost rising an average of over 8% a year for four-year institutions, you must save with inflation in mind.

2. Save early and often. The sooner you begin to set aside funds for college, the less you will have to save on a monthly basis. Allow your investments to grow along with your child.

3. Set up a systematic savings plan. Try to save monthly or quarterly, just as you would if you were paying off a car or a mortgage. (Please note, such a period savings or investment plan does not assure a profit and does not protect against loss in declining markets.)

4. Keep a separate college account. The most popular are custodial accounts. These accounts ease the tax burden by allowing parents to shift some of their assets to the child at the child's lower tax rate.

5. Involve the family. Children are more aware of family finances and accept responsibility when they are involved. It also becomes easier for you if the child is able to contribute to the fund.

Create an incentive program with your child. Offer to match the money the child makes to his own account. Teach him or her to work and help contribute to their fund - they will value their education even more.

College funding takes discipline, effort, and planning. It's also becoming more complex every year. Rely on our financial planning expertise to help design a program that best fits your family's needs and situation.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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~Tax Law Advisors provides customized pre-tax planning today, so Corporations and their Owners can enjoy a better tomorrow.~

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With the price of an undergraduate education skyrocketing, it's little wonder that college tuition oftentops the list of families' financial concerns. Instead of letting the high cost of college intimidate you, however, it's far smarter to create a savings plan and then put it into action. Below are a few of the powerful programs that can help you fund future college costs.

Coverdell Education Savings Accounts

One option is the Coverdell Education Savings Account (ESA), formerly known as the Federal education IRA. A Coverdell ESA allows families with adjusted gross income of less than $220,000 ($110,000 for single filers) to contribute up to $2,000 of after-tax income per student each year. As long as these funds are used for higher education, they are not taxable. (Benefits disappear for families earning more than $220,000 annually, or singles earning $110,000 per year.)

Contributions: Any individual who meets adjusted gross income (AGI) requirements can make a non-deductible contribution on behalf of a child under the age of 18. The AGI requirements are $95,000 for single taxpayers and $190,000 for married taxpayers. The $2,000 annual contribution limit is phased out for single taxpayers with AGI of $95,000 to $110,000 and for joint filers with AGI of $190,000 to $220,000. Although a child may be the beneficiary of any number of Coverdell ESAs, the total contributions for the child during any tax year cannot exceed $2,000. Contributions to a Coverdell ESA may be made until the due date of the contributor's federal income tax return, without extensions.

Withdrawals: Distributions are tax-free as long as they are used for qualified education expenses, such as tuition, books, fees, etc., at an eligible educational institution. This income exclusion is not available for any expenses for which the Hope Credit or the Lifetime Learning Credit is claimed for that student. If the distribution exceeds education expenses, a portion will be taxable to the beneficiary and will be subject to a 10% tax penalty. Exceptions to the penalty include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

If there is a balance in the Coverdell ESA at the time the beneficiary reaches 30 years old, it must be distributed within 30 days. A portion representing earnings on the account will be taxable and subject to a 10% penalty. The beneficiary may avoid this tax and penalty by rolling over the full balance to another Coverdell ESA for another family member.

Section 529: College Savings Plans

Another attractive option is the Section 529 college savings plan. A 529 plan is a tax-advantaged investment plan designed to encourage saving for the future higher education expenses of a designated beneficiary (typically one's child or grandchild). The plans are named after Section 529 of the Internal Revenue Code and are administered by state agencies and organizations.

Each state that offers a 529 plan determines how its plan is structured and which investment options are offered. While most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as a state tax deduction, a matching grant, and scholarship opportunities, protection from creditors and exemption from state financial aid calculations, for investors who invest in 529 plans offered by their state of residence.

There are two types of 529 plans: prepaid and savings. Prepaid plans (sometimes called guaranteed savings plans) are offered in 18 states and allow for the pre-purchase of tuition based on today's rates and then paid out at the future cost when the beneficiary is in college. Performance is often based upon tuition inflation. Prepaid plans may be administered by states or higher education institutions.

Savings plans are different in that your account earnings are based upon the market performance of the underlying investments, which typically consist of mutual funds. Savings plans may only be administered by states. 48 states and Washington, D.C. offer a savings plan. Most 529 savings plans offer a variety of age-based investment options where the underlying investments become more conservative as the beneficiary gets closer to college-age. They also offer risk-based investment options where the underlying investments remain in the same fund or combination of funds regardless of the age of the beneficiary. In addition, many savings plans offer a stable value or guaranteed option designed to protect an investor's principal while providing for some investment growth, while others offer investments in certificates of deposit.

With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current popularity and tax advantages. Prior to EGTRAA, 529 plans grew tax-deferred and distributions from 529 plans for qualified higher education expenses were taxed at the beneficiary's federal income tax rate. After EGTRAA, 529 plans still grow tax-deferred but distributions from 529 plans for qualified higher education expenses are exempt from federal income tax. The 529 plan provisions of EGTRAA, originally set to expire after 2010 due to a sunset provision, were made permanent by the Pension Protection Act of 2006. This permanency means you can save in a 529 plan knowing that your withdrawals for qualified education expenses will remain free from federal income tax! Many states mirror the federal tax advantages for 529 plans by offering state tax-deferred growth and tax-free withdrawals for qualified higher education expenses.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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~Tax Law Advisors provides customized pre-tax planning today, so Corporations and their Owners can enjoy a better tomorrow.~

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Even if you haven't been able to save all the money you need for college, several alternatives exist to help you make up the difference.

Financial assistance comes in many shapes and sizes - from scholarships and grants, which do not need to be repaid, to federal loans, which carry very favorable interest rates and terms, but must be repaid eventually. The following are a few of the most popular sources of financial assistance:

Calculating Financial Aid

Usually due before January 1, the standard federal Free Application for Federal Student Aid (FAFSA) determines how much, if any, financial assistance the government will award to your child. Both private and public schools use this standard form to dole out their own scholarship monies as well. Additionally, some schools now require the Financial Aid Profile for assessing the need for non-government dollars.

Working with a number of factors, a school will determine each family's need for financial aid. From there, financial aid officers will attempt to craft a package, often combining both grants, which don't have to be paid back, and loans, which must be repaid later, usually with accrued interest. Clearly, the better deal is the free money. Often the earlier one applies, the more of their funds will come from the "grant" side of the ledger.

Government Loans: Stafford: With a Stafford loan, the US Government either provides the funds for the loan, or guarantees the funds loaned by other institutions. The loans are available regardless of family income, but for families with incomes under $70,000, no interest accrues and no payments are required until the student leaves school.

Government Loans: PLUS: The Parent Loan for Undergraduate Students (PLUS) loans are federally funded and guaranteed loans issued through local banks, credit unions and savings & loan institutions. The maximum loan amount is defined as the total cost of college, minus the amount of financial aid received. Repayment of principal and interest begins immediately with interest capped at 9%. Loan insurance is required to qualify for a PLUS loan.

Work/Study Grants: Many colleges and universities offer work/study grants. Sometimes their earnings are deducted from tuition and other times the student earns a salary.

Americorps: This network of national service programs engages more than 50,000 Americans each year in intensive service to meet critical needs in education, public safety, health, and the environment. It is open to U.S. citizens, nationals, or lawful permanent residents aged 17 or older. Members serve full or part time over a 10- to 12-month period.

After successfully completing a term of service, AmeriCorps members who are enrolled in the National Service Trust are eligible to receive an education award. The education award can be used to pay education costs at qualified institutions of higher education or training, or to repay qualified student loans. The award currently is $4,725 for a year of full-time service, with correspondingly lesser awards for part-time and reduced part-time service. A member has up to seven years after his or her term of service has ended to claim the award.

The GI Bill: Veterans, active duty personnel, and their families are eligible for a wide variety of benefits and loan repayment programs under the GI Bill, U.S. Army college fund, and VA educational services.

These are just some of the many ways to defray the rising costs of college. Contact us for more information on how to make higher education a reality for your children or grandchildren - or perhaps even yourself!

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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