There are many variables to take into consideration when saving for your child’s education including: the cost of tuition, room and board, books and school supplies, personal expenses, and travel; not to mention how your personal financial situation and tax bracket can affect which method of saving will be most efficient.

Determining which costs you are willing to cover is an important first step in determining how much you will need to save for your child’s education. When determining these costs, it will be the most helpful to visit the school’s website, as each October schools that award federal financial aid are required to post a net price calculator. Most school websites will even break out the costs into categories similar to those mentioned above.

In order to get the most out of your investment in your child’s future, many parents recommend making a performance based deal with your child, where you cover costs only if your child maintains a certain GPA or increase coverage of education costs if, for instance, your child makes the “Dean’s List.” Another recommendation in establishing costs is to balance the cost of education with future benefits. This recommendation comes in reference to choosing whether to send your child to a public institution or a private one.

SAVINGS OPTIONS

There are many options when it comes to saving money for your child’s education, each with its own benefit, and determining which vehicle will most suit your needs can be a complicated process. We have identified several mediums to save for a college education.

• The 529 plan is perhaps the most popular way to save for a college education. 529s are tax-free investment vehicles operated by different states, with some states offering a tax deduction,  and can be used to meet qualified costs nation-wide. There is no requirement to use the plan from your home state and any state plan can be used to pay for qualified expenses at any college. If your home plan is not a good one and there is no tax deduction offered, using a better 529 plan from another state may make sense. A contribution to a 529 plan is considered a gift, and is therefore subject to gift taxes and the rules regarding estate taxes and the estate tax exclusion. Each person may contribute up to $13,000 in 2011 without triggering gift taxes. Therefore, a married couple filing jointly may contribute up to $26,000 ($13,000 each) to the 529 plans of a single person. There are no income limits for 529 plan contributions, however each plan does set maximum contributions. It is important to note, if the funds in a 529 plan are not used for qualified college expenses, there is a 10 percent tax penalty on the amount withdrawn. The problem with most 529 plans is not allocating funds properly within the plan. Automatic rebalancing is one solution offered, however more attention is needed here, because, you would not want your plan to rebalance away from its allocation to equities at the market low just as a function of the plan schedule saying it is time to reallocate. Another consideration for 529 plans is that paying the extra fees for the management of the plan may not make sense if you are in a low enough tax bracket.

• The Coverdell Education Savings Account [ESA] can be thought of as an “education IRA.” The Coverdell ESA, like the 529 plan, comes with tax free growth, however, like an IRA, there is a maximum investment set at $2,000 per child, per year. The Coverdell ESA provides tax free distributions for the designated beneficiary for use on qualified education expenses. Any distribution above the qualified education expense will be taxed and any remaining amount left in the account will be distributed at age 30 if not withdrawn prior to.

• Another option to grow your money is a custodial account under the Uniform Gift/Transfer to Minor Act. One difference here is that there are no contribution limits or restrictions to what the money can be used for, as long as withdrawals are used to benefit the child. The income from a custodial account must be reported on the child's tax return and is taxed at the child's rate, subject to the Kiddie Tax rules and is considered an asset of the child, which may affect financial aid eligibility. It is also important to note, a risk comes when the child reaches “majority age,” usually 18, and then has access to the money for whatever strikes their fancy.

• Along those same lines, a trust account can be a good way to save for your child’s education because the age restrictions can be set to the parents’ specifications. There are also no limitations to how much can be deposited into the trust. However, within a trust the money will not grow tax free. Furthermore, trusts accounts may also work against eligibility for financial aid.

• Life insurance is increasingly becoming a more popular option to save for your child’s education, assuming you are healthy and the child is young. The slow, steady growth mechanism of life insurance makes this an attractive investment vehicle.

OTHER RESOURCES

The following are some resources you and your child may find useful for researching different colleges and funding options.

• Saving For College [www.savingforcollege.com] is a great online guide to different ways to fund a college education as well as a very good research data base on different 529 plans.
• College Navigator [http://nces.ed.gov/collegenavigator] is a federal database that includes statistics on colleges and universities.
• MeritAid.com [www.meritaid.com] provides a directory of scholarship provided by schools.
• College Board [www.collegeboard.org] provides a great snapshot of different schools, including financial aid and cost statistics.
• College Data [www.collegedata.com] offers many statistics on different schools’ profiles, including admission factors that a particular school finds important, as well as those factors which the school does not.
• Unigo [www.unigo.com] is a site containing student reviews of colleges and universities.

With all of the financial options and variables to take into consideration while determining the most effective way to save for your child’s education, the Next Generation Wealth Management team welcomes an opportunity to discuss which options make the most sense for you.