Financial Planning        Life        Retirement & Annuities        Disability        Health        Long Term Care    
        College Planning        Tools & Calculators        Articles & Info         Definitions of Terms


More on college education:
   Higher Education Costs
   Calculate Funding Needs
   Articles & Info
Definitions of Terms


Review getfinancialadvice.com on alexa.com
Contact Financial Advisor About Funding College Education

Paying for College

How can I fund my child's college education?

There are quite a few options to choose from, such as:

What are the differences between the different college savings plans?

529 Plans or Qualified Tuition Plans

General 529 Plans are federal tax-advantaged savings plans sponsored by states, state agencies, or educational institutions to encourage savings for future education costs. As such, the earnings portion of withdrawals used for qualified education expenses are federal income tax free. State income tax treatment depends upon the state. Some states may offer different or additional tax incentives. Non-qualified withdrawals are subject to tax plus a 10% penalty. A management fee from less than half a percent to slightly over 1 percent per year may be charged. If owned by a parent it is considered a parental asset (generally assessed at 5.6%). Impact on financial aid varies by institution.

State Prepaid 529 Plans are designed to prepay fees and tuition at in-state colleges and universities. By prepaying tuition, participants benefit by purchasing some percentage of future tuition at today's tuition price. Participation may require that either owner or beneficiary be a state resident. Some may have provision to include room and board. Some states may also offer favorable state income tax treatment. Contributions to a beneficiary's plan of up to $13,000 per year may be excluded as a gift or up to $65,000 prorated over 5 years. There is no annual limit to contributions to a plan, however there may be a maximum account balance allowed (usually between $200,000 and $300,000). Management fees apply and vary by state (industry avg from less than .5% to just over 1%). State agencies typically guarantee the benefit.If owned by a parent it is considered a parental asset (generally assessed at 5.6%). Impact on financial aid varies by institution. Some plans have closed to new entrants. Check the College Savings Plans Network for status on specific state plans.

Independent 529 Plans share the same features as the 529 State Prepaid Plans except that instead of being sponsored by a state and limiting participation to state residents, the participating colleges belong to an organization of colleges and universities over various states. When the student is ready to attend he/she may use the purchased tuition certificates or units at the participating institution of choice, assuming the student is accepted. Generally, no fees are charged to account owners. If owned by a parent it is considered a parental asset (generally assessed at 5.6%). Impact on financial aid varies by institution.

Back to top...

Coverdell Education Savings Account (CESA or ESA) Plans

Coverdell Education Savings Account (CESA or ESA) Plans also benefit from federal tax-free qualified withdrawals. However, this allowance is set to expire on December 31, 2010 and it is unknown as to whether or not Congress will extend it. No state tax deductions apply. Non-qualified withdrawals are subject to income tax plus a 10% penalty. Management fees apply and vary by investment vehicle (industry avg from less than .5% to just over 1%). Investment options are mutual funds and securities. Maximum contribution allowed is $2,000 per year, per beneficiary (until beneficiary reaches age 18, unless he/she is a special needs beneficiary). Not available to high-income families ($220,000 joint - maximum MAGI , $110,000 single - maximum MAGI). A phase-out range applies if MAGI > $95,000 for single filers and > $190,000 for joint filers. If owned by a parent it is considered a parental asset (generally assessed at 5.6%). If owned by a student generally assessed at 20%. Impact on financial aid varies by institution.

Custodial Accounts (UGMA/UTMA)

Custodial Accounts (UGMA/UTMA) are tax-advantaged accounts held and controlled for a child by an adult custodian. Once the child reaches the age of majority (age 18 to 25 depending on the state of residence) he/she takes control of the account and may use the money in the account for anything. These accounts can be set up at most brokerage firms, mutual-fund companies or other financial instituion. The accounts are funded with gifts of money, mutual funds, or securities, according to the Uniform Gift to Minors Act (UGMA), or any other type of property, according to the Uniform Transfer to Minors Act (UTMA). The funds are considered assets of the child and as such the first $950 of earnings is federal income tax free. Earnings between $950 and $1,900 are taxed at the child's rate and earnings above $1,900 for certain children are taxed at parents rate. No state tax deduction applys. There are no penalties for withdrawals used for other than education. Fees charged depends on the investment vehicle (industry avg from less than .5% to just over 1%). Regarding Federal Financial Aid it is generally assessed at 20% as the student's asset. Impact on financial aid varies by institution.

Taxable Accounts

Taxable Accounts receive no tax advantages and therefore are not subject to any restrictions. Their impact on federal financial aid varies by institution. As a parental asset it is generally assessed at up to 5.6% and as a student's asset generally at 20%.

Back to top...

Traditional (Classic) IRA

Traditional (Classic) IRA is Federal income tax deductible subject to income limits (Phase out ranges: $55,000 to $65,000 for single filers and $89,000 to $109,000 for joint filers). Earnings are federal income tax-free until withdrawal at age 59 1/2. Withdrawals for higher education expenses are not subject to 10% penalty but are taxed at owner's tax rate. State income tax is dependent on state tax law. Fees depend on underlying investment vehicle. Impact on federal financial aid varies by institution. As a parental asset it is generally assessed at up to 5.6% and as a student's asset generally at 35%. Contributions are limited to $5,000 for age 49 and below, and to $6,000 for age 50 and above.

Education Savings Bonds

Education Savings Bonds interest earned is federal income tax-free for qualified withdrawals (subject to income limits). State income tax treatment depends on the state. For non-qualified withdrawals 3 months of interest is forfeited if redeemed within first 5 years. No fees apply. Room and board, and books are not qualified expenses however payments to qualified state tuition programs, 529 Plans or CESAs are eligible. Investment options include Series EE bonds issued January 1990 and later, and all Series I Bonds. Contributions to a beneficiary's plan of up to $13,000 per year may be excluded as a gift or up to $65,000 prorated over 5 years. There is no limit on the amount of bonds that you can accumulate over a lifetime, however only $30,000 of Series EE Bonds may be purchased per year, per person. Impact on federal financial aid varies by institution. As a parental asset it is generally assessed at up to 5.6%. Federal income tax deductions for 2009 apply for single filers up to $84,950 with phase-outs beginning at $67,950 and for joint filers up to $134,900 with phase-outs beginning at $104,900.