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Saving for College

November 2004
Saving for College

Paying for college is one of the greatest concerns for families. People realize that college education is necessary to get a good paying job in the industrialized society. Competition for good jobs and advancement is making professional degrees more and more important.

Education costs have been rising faster than inflation. Increasing costs are making it more difficult for most families to provide for their children's college education. The student might win a scholarship but there is no guarantee. The sooner one starts a college savings plan the better. Longer time horizon permits the investor to seek out more growth oriented investments and also reap the benefits of compounded growth. Tax advantages provide additional incentives for saving.

529 Plans

The 529 Plan offers great tax advantages. These plans come in two forms: savings and pre-payment. In the pre-payment plans parents pay the current tuition at state institutions or purchase units that can be used for education in or out of state. Saving plans allow people to contribute funds that can be withdrawn tax free for qualified higher education expenses. Qualified expenses include charges for tuition, fees, books, supplies and equipment for enrollment or attendance at an eligible educational institution.

Georgia has a good 529 Plan as do many other states. Many plans are also available through brokers. Anyone can establish such a plan and there can be more than one plan for the same beneficiary. It does not take much money to open an account and regularly contribute funds thereafter. Unspent funds can be used to pay for the college education of other relatives. Contributions to 529 plans may also be tax deductible for in-state plans. Please check with your state and/or your financial/tax advisors for details.���There is also a very good guide to college savings plan at www.SavingForCollege.com.

Coverdell Education Savings Accounts (Education IRAs)

Tax payers with income below certain limits can contribute $2,000 per year to an Education IRA for a beneficiary. Contributions grow tax free and no tax is incurred if the funds are used for qualified educational purposes. The beneficiary, however, can claim the unspent balance in the account upon reaching the age of 30.

Unlike the 529.plans, Education IRAs can also be used to pay for elementary and secondary education.

Traditional or Roth IRAs

Most people think of these as effective tools for retirement savings but they can also be used to fund college education. Tax advantages available with these funds are quite different from the ones offered by 529 Plans and the Education IRAs.

Uniform Gifts to Minors Act (UGMA)

Any donor can contribute cash or property to the custodian (usually the donor) for the benefit of a minor. Although these accounts were not specifically designed for funding education, there is no prohibition on using them for the college education of the beneficiary. In most states, however, the beneficiary is entitled to take possession of the assets upon reaching the age of majority. Earnings on the account are reported annually and are taxed at the parent's rate above $1,400.

There are many other ways to help pay for the college expenses of the student. Some of these are:

a) Savings Bonds.

b) Hope Credit and Life Time Learning Credit.

c) Employer provided education assistance.

d) Need based financial Aid.

e) Stafford and Plus Loans.

f) Student Loans.

g) Co-op and other work study programs.

h) Pell Grant.


The student might even qualify for a scholarship or grant but there is no guarantee. As such, the sooner one starts saving the more one can take advantage of the tax free growth over a longer time horizon. So, take action by opening an account if you have a child or a grandchild and ensure that he/she is not deprived of a college education for lack of funds.

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