The parents of young children heading off to school may be breathing a sigh of relief. Meanwhile, the parents of young adults heading off to college are taking a deep breath and reaching into their wallets… or heading to the bank. Adjust today’s college costs for inflation and multiply by four years and by the number of children in your family, and the total outlay can be staggering. In fact, four years at a private college might possibly cost more than your home. And next to retirement, this may be the biggest expense you and your family are likely to face. For many parents and – is often the case – grandparents, paying for higher education requires saving in advance or the use of loans to create an extended payment period. Grants and scholarships are to students available through schools, the government, and many independent sources. Eligibility varies by program and state, but whatever approach you choose to take, the sooner you get started, the better. A few of the savings programs made more attractive by special tax status are:

Custodial Accounts. Uniform Gifts to Minors (UGMA) or Uniform Transfers to Minors (UTMA) accounts are historically popular education savings options and offer certain tax advantages. Once the child is 14 or older, the income that these accounts have generated is taxed to the child in his/her bracket — which is usually considerably lower than the parents’.
However, a gift to a UGMA/UTMA account is irrevocable: the money belongs to the child, and control goes to the child at the age of majority (which varies by state). A custodian cannot change his/her mind and take the money back. And because the custodial account belongs to the child, the balance in the account can reduce the ability to qualify for financial aid, loans or certain scholarships.
As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, two other tax-advantaged savings vehicles – Coverdell Education Savings Accounts (formerly known as Education IRAs) and Qualified State Tuition Programs — have become more attractive.

Coverdell Savings Accounts. The Coverdell Savings Account has a maximum annual contribution limit of $2,000. In addition, qualified distributions can include withdrawals made to cover elementary and secondary school expenses, as well as tuition for private and religious schools. As long as the money saved and the income it generates is used for education purposes, it is exempt from income tax.

Qualified State Tuition Programs (529 Plans). These plans are state-sponsored investment programs that have special tax status under Section 529 of the Internal Revenue Code, and usually include both a prepaid tuition program and a savings-account plan. 529 plans offer investors professionally managed tax-advantaged portfolios to help meet rising college expenses. Currently, contributions in these plans grow tax-deferred and withdrawals are tax-free to the student when made for the payment of qualified education expenses. Proceeds can be used at any accredited post-secondary school in the United States.
Anyone may contribute on behalf of a child — including parents, grandparents, other relatives and family friends — regardless of income or state residency. Maximum contributions vary from state to state, but typically exceed $125,000. With the high contribution maximums and no income restrictions for participation, these plans have become a very popular tax-advantaged savings vehicle. Make note that though qualified withdrawals from 529 plans are free of federal income tax, state income taxes may still apply.
By contrast with custodial accounts, the account owner retains control over distributions from the account and the asset is considered a parental asset for financial-aid purposes. If the child decides not to attend college, the account owner still controls withdrawals and is free to change beneficiaries (any new beneficiary must be related to the original beneficiary), leave the assets in the plan for later use, or withdraw the assets. The earnings portion of any nonqualified withdrawals is generally taxed at the owner’s tax rate and is subject to a 10 percent penalty. If the child wins a scholarship, the owner will be refunded the scholarship amount without penalty.
AS an interesting side note, the law now permits contributions to be made to both a Coverdell Education Savings Account and a 529 plan during the same year for the same beneficiary to further encourage savings for this important goal.

For most people, saving for college requires systematic discipline and an on-going awareness of current programs and new strategies available to assist you. Work with your Life Consultant in analyzing your college funding needs, determine how much you need to save, and recommend appropriate investments to get you there. As many education saving initiatives have tax and/or legal implications and these variables may change at any time, it is extremely important to consider college funding as an on-going endeavor. Start early, be consistent, and you should be able to meet the challenge of college costs.