Strategies for Paying
Persistence comes in handy when you're looking for ways to meet college costs.
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There's little question that 529
plans and Coverdell
education savings accounts (ESAs) deserve the positive attention they receive.
But they're not the only way to pay for college. Parents were successful in finding
ways to foot tuition bills long before these plans were introduced, and some of
those earlier methods still merit investigation.
Several of these approaches, like taking a home equity loan, involve long-term
commitments and a level of risk you'll have to consider carefully. But it pays to
know about the choices you have, since one of them may just be the solution you're
looking for.
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GIVING
GIFTS TO MINORSIf you want to give your child - or any
minor - substantial financial gifts, you can set up a custodial
account.
You or a person you select controls the account until the child reaches
majority, which can be 18, 21, or 25 depending on the state where the account
is set up and the type of account it is. It doesn't cost anything to set up an
account and the only fees are trading costs when you buy or sell securities and the fees attached to mutual
funds or other investment products you own in the account.
Custodial accounts fall under either the Uniform Gifts to Minors Act
(UGMA) or the Uniform
Transfer to Minors Act (UTMA) and are generally known by
those acronyms. The major difference is that UTMA contribution rules are more
flexible, permitting assets such as real estate and fine art that don't
produce regular earnings.
You can contribute as much or as little as you like to an UGMA or
UTMA account, though annual gifts over $13,000 (or $26,000 if a married
couple filing a joint return make the gift) are potentially taxable
to the giver. You can invest the assets as you see fit. Any
income or capital gains tax that
may be due each year is figured at the beneficiary's rate once the
child is 19, or 24 if a student. For younger children, tax on investment
earnings over the exempt amount is figured at their parents' rate.
TAKE A SECOND LOOKCustodial accounts may work well as college savings
plans because you have enormous discretion over how to invest the assets.
The more confident you are about choosing a diversified portfolio,
the more attractive this approach may seem.
However, UGMAs and UTMAs also have some potential drawbacks.
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If the
beneficiary
applies for financial aid, she or he
will be expected to contribute up to 35% of the balance each year in keeping
with the standard formula.
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When the beneficiary
reaches majority, she or he has the right to assume control of the
account.
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Any earnings are
taxable, unlike earnings in a 529 or ESA.
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COLLEGE?
SUREYou can buy special certificates of deposit, called
CollegeSure® CDs, which let you prepay future college costs at today's
rates, plus a premium based on the child's age and the amount you invest.
The CDs, issued by the College Savings Bank of Princeton (NJ), pay annual
interest rates linked to increases in an index of average college costs and never
less than 2%. Your CDs are insured up to a total of $250,000 in 2009, and at maturity
you're free to use the money as you choose.
While these accounts guarantee a specific level of return, you may be able to earn more in a diversified portfolio you put together
yourself. And interest on the CDs is taxable, unless you own them within a
Coverdell education savings account or participating state 529 plan.
For more information, go to www.collegesavings.com.
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HOME EQUITY LOANS
Your biggest ace in the hole when it comes to paying for
college may be the equity
you've built up in your home. That's because you
can usually borrow more cheaply with a
home equity loan
or home
equity line of credit (HELOC) than with
any personal loan, and the interest you pay may be tax deductible in most
circumstances, lowering the cost of the loan even more.
If you bought your home when your child was small, the original
mortgage
may be nearly paid off. That makes it easier to arrange an equity loan.
And writing a check to the lender every month won't come as such a financial
shock since you've been making mortgage payments all along.
Home equity loans are not a perfect solution, though. First, the money has
to be paid back, usually starting immediately. And, if for some reason you
default, or fail to pay back your loan, you run the very real risk of
losing your home.
DEGREES FOR LESSIf you're looking for other ways to save money on
college costs, you might consider encouraging your child to consider
an accelerated program:
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Some colleges offer
credit for high school advanced placement courses, which could mean finishing a
degree a semester, or even two, early.
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Credits earned at
local colleges during summer school may count toward graduation and can reduce
the number of semesters required.
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Some colleges offer
three-year programs that move students through their required courses more
quickly.
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Two years at a
community or junior college before transferring to a four-year college or
university will help lower the total cost of a degree.
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A
BOND DEAL
Baccalaureate
bonds are something else to keep an
eye out for. Some states issue special tax-exempt
zero-coupon
bonds, usually
sold in small denominations so you can build up a portfolio of them on your
own investment schedule.
Because the bonds mature on a specific date, you can time them so you'll
have cash on hand every semester or every year. Some of them provide an
extra bonus if you use the money to pay tuition at an in-state school.
But if you sell these bonds before they mature, you stand a good chance
of losing money, as well as depleting funds you'll need for college.
WHAT'S NOT SMARTOne of the conflicts you may wrestle with is whether
to use the money you've invested for retirement to pay for your child's
education. Most financial advisers think it's a bad idea because it
may leave you short of income later on. But if it makes the difference
between your child's going to school or not, you may consider a loan
from your employer's plan - if the plan allows loans - or
a withdrawal from your IRA.
The loan isn't income, so there's no tax. But if you leave your job
before repaying the full amount, the balance will be considered an
early withdrawal, subject to tax and a federal tax penalty if you're
younger than 59 1/2.
If you take money from your traditional IRA, you'll owe income tax
on the earnings portion of the amount you withdraw and on the contribution
portion if you deducted it, though not a prepayment penalty. That's
because paying college expenses is considered one of the legitimate
reasons for early withdrawal.
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© 2009 by Lightbulb Press, Inc.
All Rights Reserved.
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