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.
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.
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-thousand—or married couples earning between $195-thousand and $220-thousand—the law gradually reduces the usual $2,000 contribution limit.)
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 accounts—also called Qualified Tuition Programs—grows 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
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
offer a 529 prepaid tuition plan through which parents can purchase a contract
today—at today’s prices—for 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
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.
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
Your college's financial aid administrator