For many Americans, college or some form of higher education has been an important part of the "American Dream" - one way to try and insure that our children's future will be brighter and more prosperous than our own.

 

As costs for higher education continue to increase and investment markets seem to become more volitile, the ability to plan and save has become more challenging.   This article will briefly review many of the options available to families.

 

 

Fianancial aid can take many forms - grants, loans and awards.  Often these programs are need-based, but many colleges also offer assistance to students who meet certain qualifications, like high test scores or superior grades.    For need-based financial aid, bear in mind that assets held in a child's name can actually decrease your ability to qualify.  Generally, financial aid formulas require that 20% of assets in your child's name be used to for college costs, but only 5.6% of assets held in the parent's name.  If you think your family might qualify for need-based financial aid, be sure to seek guidance about how best to structure your savings plan.

 

 Section 529 Plans

 

Named after the section of the Internal Revenue Code that permits them, these plans offer numerous tax advantages to finance higher education costs.  All 50 states now have them, and hardly any two are similar.  Money invested in these plans grows tax-free and withdrawals for qualifying expenses (tuition, room and board, books and fees) are also tax-free.  Each of the plans is under professional investment management and typically offer a variety of investment programs.  Be sure to check out sales loads and fee, as well as penalties that might apply for closing accounts or switching from one state plan to another.  By the way, you are free to choose among all 50 plans regardless of your state of residency.  One good source for additional information is www.savingforcollege.com

 

In addition to state-level programs, a consortium of nearly 300 private colleges and universities have created The Independent 529 Plan.  Through this progam, a parent can purchase "tuition certificates" that lock in future tuition costs at today's prices for any one of the member institutions.  More information can be found at www.independent529plan.org

 

Also known as Coverdell Education Savings Accounts (ESAs), these accounts operate similarly to 529 Plans for income tax purposes, but can also be used to fund for K-12 expenses.   Drawbacks include the fact that you can only contribute a maximum of $2,000 per year, and these accounts are going to be limited after 2011 unless Congress extends them.  Without further action, these accounts will be limited in 2012 to accepting maximum annual contributions of only $500.

 

These are accounts set up for minor age children under state law Uniform Transfers to Minors or Uniform Gifts to Minors Acts.  They are an easy way to gift property to a minor child, but do not offer tax-deferred growth.  As a child's account, they may also turn out to be counter-productive for financial aid purposes as mentioned above.

 

In addition to these common techniques, certain trust accounts, which are beyond the scope of this brief overview, can also offer after-tax advantages.  For parents that have not done any planning or saving, the Tax Code does offer a number of income tax deductions and income tax credits to help offset the burden of current year tuition costs.  A helpful resource in this regard is IRS Publication 970, which can be found at www.irs.gov