While there are numerous ways to fund a college education, here are several of the most popular:
Mutual Funds
Mutual funds are sold by prospectus. The prospectus
contains detailed information about the particular mutual fund's
goals, objectives, investment style, charges, and expenses. A
prospectus for a particular mutual fund can be obtained from Lane Bridgers and should be read carefully before you invest. Investors
should realize that return and principal value of shares in a mutual
fund, other than a money-market mutual fund, will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. Investors should also remember that funds whose
investments are concentrated in a specific sector may be subject to a
higher degree of market risk than funds whose investments are
diversified. All mutual funds involve investment risk, including the
possible loss of principal.For information on how to choose mutual funds to fund
your child's or grandchild's college education, contact
us.
Zero-Coupon Treasury Bonds
Zero-coupon bonds work like U.S. Savings Bonds: you
buy them at a deep discount and receive the face value at maturity.
Most zero-coupon Treasury bonds (often called "zeros") are
available with a minimum $1,000 face value. They are backed by the
full faith and credit of the United States government. When used for
college savings, investors will usually buy them with a maturity date
that matches the date that the child will enter college.The issuer makes no interest payments during the life
of the security. When it matures, you receive the full face amount,
which equals your initial investment plus the interest compounded over
the life of the bond. There are many different structures available
for U.S. Treasury zero-coupon bonds, including STRIPS, FICOs, and
REFCOS.For more information on how zero-coupon bonds can help
you fund your child's or grandchild's education, contact
us.
College Financial Aid
FinAid,
The Financial Aid Information Page
FinAid offers a wide range of resources. It's well worth a visit on
the strength of one of these alone: FastWEB (Financial Aid Search
Through the WEB), a database that uses an online questionnaire to
match your needs to more than 180,000 private-sector sources of aid.
FinAid is maintained by Mark Kantrowitz, author of The Prentice-Hall
Guide to Scholarships and Fellowships for Math and Science Students,
and is sponsored by the National Association of Student Financial Aid
Administrators.
CollegeNet
CollegeNet is
designed mainly to help users search databases for appropriate colleges,
but it also offers a financial-aid link to a variety of resources.
Information sources found through the links include the Department of
Education, the Federal Trade Commission (for avoiding financial-aid
scams), and banks offering student loans.
Custodial Accounts (UTMA)
One way to accomplish this is to use a custodial
account established under the Uniform Gifts to Minors Act (UGMA) or the
Uniform Transfers to Minors Act (UTMA). While the accounts offer certain
tax advantages, earnings on these accounts may be subject to the "kiddie
tax" if the child is younger than 18 years old. In essence,
earnings on the account are taxable at the parent's highest marginal
rate. If assets are invested in growth-oriented investments with minimal
dividends or interest until the child turns 18, the impact of the "kiddie
tax" can be minimized.
In addition, UGMA/UTMA accounts are irrevocable gifts:
the money belongs to the child, and control goes to him or her at the
age of majority (which varies by state). And UTMA/UGMA accounts reduce
your eligibility for financial aid.
Coverdell Education Savings Account
(Education Savings Account - ESA)
Families may contribute $2000 per year to a special
ESA IRA for each child up to age 18. Contributions are nondeductible;
but interest, dividends, and capital gains accumulate tax-free until
the student reaches age 30. At that time, the funds must be withdrawn
and are free of taxes and penalties if used for higher-education
expenses. Or they can be transferred to an education IRA for a
qualified family member. Contributions are phased out if the
contributor's income is $95,000 - $110,000 (single), or $190,000 -
$220,000 (joint).
529 College
Savings Plan
New state-sponsored investment programs have special
tax status under section 529 of the Internal Revenue Code. A 529 Savings
Plan, also known as a "qualified state tuition program" or
"QSTP," provides for tax-deferred accumulation of all account
earnings until qualified withdrawals for higher-education expenses are
made by the student. Withdrawals will be taxed to the student at that
time-not to the participant who made the original contributions. 529
Savings Plans feature low minimum contribution requirements and high
contribution limits-unlike the Education IRA, which is limited to $500
annual contributions.
*Please be aware there are potential risks and costs
associated with 529 College Savings Plans. The exemption of qualified
withdrawals from federal income tax will expire on December 31, 2010
unless extended by Congress.
