Article: Paying for college

In today's highly competitive admissions process, families must never lose sight of the fact that nothing is more important to parent or student than an acceptance letter! Your second priority is how you're going to pay for it.

Planning for college can begin as early as birth and proper financial planning in the early years can make all the difference when it comes time to have to cough up all that cash - as much as $180,000 (2006). Here are some of the best ways to save for college:

Custodial Accounts:

With Uniform Gift or Uniform Transfer to Minors Act Accounts (UGMA or UTMA), parents, grandparents, etc., can each contribute up to $12,000 per student per year (2006). This money can be used for college or for any other purpose. While the money remains in the student's name, the custodian, usually a parent, has absolute control over the account. UGMA accounts accept cash only. UTMA accounts accept cash and property.

The Downside:

UGMA and UTMA accounts are irrevocable gifts that are considered student assets. In the financial aid formulas, students have no asset protection allowance and are assessed (financial aid lost) 20% per year. This option must be used with extreme caution.

Education IRA's a/k/a EIRA's:

A single parent with an adjusted gross income (AGI) of up to $110,000, and joint filers with AGI's up to $190,000, can contribute up to $2,000 annually(2006). Earnings accumulate tax-free and can be withdrawn tax-free without penalty to pay for a private elementary, secondary, or college education.

The Downside:

With the current limit of $2,000, fees can eat up much of the gains in the early years. Contributions are not tax deductible and all colleges consider EIRA's parent assets and apply the 5.6% assessment when calculating financial aid. When distributions are made from these accounts the situation worsens. Financial aid is automatically reduced dollar for dollar because in addition to being an asset, the funds have now become a resource. However, the legal repositioning of these funds effectively makes them invisible to the financial aid formulas, and not one penny of the money is assessed.

529 Savings Plans:

Anyone can open a 529 Plan in his or her own name and designate a student as beneficiary. Up to $50,000 ($100,000 jointly) may be contributed over five years to a maximum of $246,000. Funds grow tax-free and since 2002, withdrawals have been tax-free as well. In many states, the contribution is even state tax deductible.

Downside:

Monies contributed are not federally tax deductible, and there is little or no control over how the funds are invested. Additionally, a 10% penalty for withdrawals applies to funds not used for college. Having money in a 529 Plan will decrease the chance for a large grant or scholarship - and that's not all. When distributions occur, financial aid is automatically reduced dollar for dollar. As with EIRA's, funds can be legally repositioned into financial vehicles that are not included in the financial aid calculations.
Retirement Plans:

An IRA, HR10 (Keogh), Pension, SEP, 401(k), 403(b), 457 or any other qualified retirement plan should be considered first when saving for college. Such plans are not regarded as assets and are not included in the financial aid calculations. While the account value is not considered an asset, contribution is added back to the adjusted gross income for an income assessment of as much as 47%. The BIG print giveth, but the small print taketh away!

Non-Qualified Savings Plans:

Families should set up these accounts to pay for unanticipated costs and the Expected Family Contribution (EFC, the minimum the federal government determines any family will pay for college). These accounts should be set up as early as possible so there will be adequate money when the time comes to pay for college. By the time students enter high school, reducing "high risk" investments should be considered. Never gamble with money that's earmarked for education.

Be this as it may, parents are strongly advised to never lose sight of the fact that all monies saved for college will not serve their purpose unless the student prepares for and successfully completes the admissions process.