Show Me the Money! Part 7: College Savings & Investment Plans

 

By DANIEL SILVER, Eastern Staff Writer

 

            Whatever happens in the future to the economy, whether up or down or more of the same, all current predictions point to a continuing rise over the coming decade in the cost of college education. Those forecasts apply as much to public schools as to private, and to both two-year and four-year programs. Still, one thing remains certain: whatever venture becomes the newest, hottest investment trend money put away for our children’s education will not go to waste.

            Planning early for a child's college finances requires foresight and sacrifice today to pave the way for smoother and surer steps toward tomorrow. Funds saved in interest-bearing accounts today can grow significantly by the time this year‘s fifth-grader, for example, collects that high school diploma on graduation day. In West Virginia, families can participate in two basic college savings programs: the Coverdell Education Savings Account (ESA), and the 529 Plans.

            Best understood as vehicles for savings rather than traditional passbook savings accounts, the Education Savings Account offers savers the advantage of flexibility.  Participants can choose among a variety of investment opportunities. Then, if market conditions change over the years, they can move their money around as they see fit so long as the invested funds remain readily convertible for the educational expenses of the anticipated student, the designated beneficiary. (Long-term stock funds, for example, are generally less readily convertible than, say, money market funds or short-term bonds.)

            Coverdell flexibility also allows more than one person to contribute to the account and contributors need not be related to the account beneficiary. In fact, anyone with annual income under $110-thousand ($220-thousand for married couples) can contribute to a Coverdell Account, as can organizations, corporations and trusts. Regardless of how many people or organizations contribute to a Coverdell account, though, the rules do set a maximum of $2,000 per year as the limit for combined total contributions to any individual beneficiary‘s account. And while the IRS does not allow deductions for contributions to the ESA‘s, the accounts do earn tax-free interest.

            But the tax benefits don‘t stop there: legally, the funds in these accounts belong to the student beneficiary, and once he or she has started college, the monies become available on a tax-free basis, as long as they go only to pay for qualified educational expenses. Those expenses include college tuition and fees, books, supplies and equipment, and even room and board (on condition that the costs do not exceed those actually charged by the institution or estimated by it for financial aid purposes). Anyone under the age of 18 qualifies as a designated beneficiary for whom investors can open and contribute to a Coverdell account up to a $2,000 maximum per year. (For individuals who earn between $95-thousand and $110-thousandor married couples earning between $195-thousand and $220-thousandthe law gradually reduces the usual $2,000 contribution limit.)

            “Parents wishing to invest more than the $2,000 Coverdell limits allow should consider the 529 savings plans which also offer important tax advantages. Like the Coverdell program, interest on these college savings accountsalso called Qualified Tuition Programsgrows tax-free, and the student beneficiary may withdraw money for qualified educational expenses similarly without paying taxes. But unlike the case of the Coverdell accounts, in many states, including West Virginia, families can also deduct contributions to the 529 programs on both their federal and state income tax returns.

For 529 plans, the rules require a minimum starting investment of $100, and allow contributions up to $11,000 before a gift tax applies, with a lifetime contribution limit in West Virginia of $265, 620. Also in contrast to the Coverdell accounts, many of these programs do impose restrictions on investment options, usually requiring more conservative asset placement as the designated student beneficiary ages. Such compulsory shifting of investments as the beneficiary approaches college age sometimes involves burdensome procedures with hefty charges attached. Parents should comparison shop among banks and brokers before committing to a plan.

            Some states offer a 529 prepaid tuition plan through which parents can purchase a contract todayat today’s pricesfor tuition at any state college or university good at the time that the student attends. Given that tuition costs have grown two or three times the rate of inflation since 1980, such prepaid plans can provide sizeable benefits. Although previously available in West Virginia, the state has closed the program to new enrollment for the time being.

            West Virginia parents thinking of sending their children to private schools, though, can still benefit from prepaid plans. A consortium of private colleges and universities has established an Independent Prepaid 529 plan. Each one of the 220 participating institutions will honor those prepaid contracts once it has admitted a designated beneficiary. If a prepaid student does not gain acceptance to a consortium school, families can request a refund.

            The law also allows families to invest in both a 529 and a Coverdell plan at the same time for the same student. Whatever college savings plan they might consider parents should always remember that assets in these accounts, and withdrawals from them to pay for educational expenses, can reduce a student’s eligibility for needs-based financial aid, such as scholarships and subsidized loans.

            But that factor by itself is almost never a reason not to start planning and saving as soon as possible for a child‘s college education.

 

Additional Resources:

All "College Tips" columns are available at http://www.newstribune.info

WV
Mentor, A Source for Higher Education in West Virginia: http://www.wvmentor.org

And http://www.wvmentor.org/FinAid/content/types_investment_plans.asp  

http://www.independent529plan.org

 

http://www.SavingforCollege.com

 

WV Apply, Admission and Financial Aid Information at http://www.wvapply.com

American Education Services http://www.aesSuccess.org; (1-304-345-7211 or toll free: 1-800-437-3692)

 

Mineral County Technical Center at http://mctc.mine.tec.wv.us/college.htm

Eastern Community and Technical College at http://www.eastern.wvnet.edu (304-434-8000; or tollfree: 1-877-982-2322)

Potomac State College of West Virginia University at http://www.potomacstatecollege.edu or (304-788-6820 or tollfree: 1-800-262-7332)

 Peterson's Get A Jump! The Financial Aid Answer Book (2nd edition)

Your local banker, financial planner or investment broker

 

Your high school guidance counselor

Your college's financial aid administrator