Considering funds for college

Saving money for children's college education takes some planning and flexibility to get the best return on the invested dollars. Professional, licensed financial planners have the investment and savings expertise that can help a family plan for their children's education.

"I would say first and foremost that people are not utilizing the IRS codes enough in thinking of how to fund education," said Steven Elefson, First Vice President of Investments at Raymond James and Associates Inc. of Jackson.

Parents can take advantage of IRS tax breaks by investing in what's known as the 529 college savings account, Coverdell Education Savings Account, and accumulate tax-free interest earnings. Each account carries provisions governing contribution limits, ownership and control of the account, and whether or not the account can be rolled over.

"A lot of people are not using the 529 savings plans which are probably still one of the best ways to take advantage of tax laws and have a good investment choice," Elefson said. "Some qualify for state income tax deductions and general are more flexible than the UGMA/UTMA."

Prior to the formation of the 529 plan, UGMA/UTMA (Uniform Gift/Uniform Transfer to Minors Account) was, and in some cases remains, the most popular way of saving for education. It is not a specific education savings plan and carries no tax breaks, Elefson said.

"However, one potential pitfall parents should be aware of is that the legislation which established 529 plans in 2001 has a sunset provision on Dec. 31, 2010, unless Congress acts to extend it," Elefson said.

Many people believe Congress will extend it, he said, but there is always some uncertainty involved.

Also, planners can advise parents on the best way to package their children's education. Both Elefson and Larry Dauer, a financial planner with the Bank of Missouri in Cape Girardeau say that it can be an advantage to the family to combine an assortment of planning options, including scholarships, grants and even loans.

"I like to tell my clients that it's probably better to start saving for their retirement before college," Dauer said. "If they don't prepare for retirement, they will get there and there will be no options left for them. There are options to pay for college other than providing all cash."

One option involving both retirement and education is to consider putting extra money into one's retirement account for a child's education, or to open an IRA account in the child's name, to get the best possible advantage when calculating a financial aid application to a college. The potential student is expected to spend 35 percent of his assets before being considered for financial aid through the college he is applying to, Elefson said. Parents are expected to spend only 3 percent of their assets. Money earning interest in a retirement account is not counted when those assets are calculated to determine financial aid eligibility.

That kind of detailed financial strategy is often overlooked when parents think about investing for education, which is why Dauer and Elefson recommend that parents enlist the aid of a qualified financial planner who can help them individualize their plans. A college tuition plan can include not only cash savings, but scholarships, grants, financial aid packages and low-interest loans.

Students and parents often rely on loans because they were unable to save enough or had not planned adequately for college, but loans don't have to mean having a huge debt accompanying the diploma.

Not only are student loans available, but a low-interest Federal Plus loan is an option for parents. Federal Plus loans can be paid back over a 30-year period, depending on the applicant's financial circumstances.

Loans can have more than just the obvious purpose in paying for college, Elefson said.

"Loans can make the students more responsible and they'll try to get through school quicker," he said. "They'll have a sense of owning his education as opposed to it being a gift."

No one single savings plan is the most effective for preparing to send a child to college, say Elefson and Dauer. Much depends on the family's income and goals. Both advise that families not only have a plan, but to keep up with changes in investing and savings. New savings options are being developed frequently, and by being aware of innovations in savings, parents can incorporate new programs into their financial plan and take advantage of all possible options.

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Tuition tips

Saving for a child's college education can be a difficult task, but financial planners offer these tips:

Before making any investments, people should consult the specific investment disclosure, such as the prospectus available for mutual funds. Some investments offered for college are not insured.

Parents do have the option of investing their money toward their children's education in the stock market, instead of a 529 account, but should be aware that dividends and interest are taxed at income rates and capital gains are taxed at capital gains rates.

Bond fund investments. Parents familiar with bond investments can use this as one way of saving for college, but bonds' earnings tend to diminish when interest rates go up.

Series EE savings bonds are issued by the federal government. Holders of the bonds pay taxes on the growth only when they cash in the bonds, except when using the bonds to pay for education provided the parents together earn less than about $80,000 per year (adjusted by the IRS every year for inflation).

Coverdell Education Savings Accounts (Education IRAs) are available to parents who make a combined income of less than $220,000, half of that amount for a single parent. Parents can put away $2,000 each year; contributions are not deductible from income, and they grow tax free if the money is used to pay for education and related expenses. Money taken out is taxed at the child's tax rate, but the account is also considered a child's asset and will reduce the amount of financial aid he might be eligible for.

Coverdell accounts can be used for tuition to private pre-college schools. The 529 accounts are used only for post-secondary tuition.

Source: American Funds and Raymond James and Associates, Inc.