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Janice France-Pettit: Financing college: saving options for the future

It’s Your Money

Posted: October 9, 2009 11:08 p.m.
Updated: October 10, 2009 4:55 a.m.
In these tough economic times, saving for your child's college tuition might seem like a daunting task, but it's more important than ever.

According to the College Board, the average yearly cost of a private university runs $25,143, and public institutions have an average cost of $6,585 per year. These prices are increasing at approximately six percent a year.

Whether you have young children and are calculating the costs for about 15 to 18 years from now, or you wish to enhance your child's existing college fund, there are steps parents can take to help assure a substantial savings for college.

529 savings plan
The 529 Plan is one of the best options for saving money for future educational expenses. It allows parents to save without paying tax on the investment's growth.

Anyone, regardless of income, can contribute up to $200,000 per beneficiary.

More than 48 states offer the tax-free plans.

Depending on the state, different investment companies administer the plans and have varying annual fees and investment options, so it's worth shopping for the right one. (You don't have to select your state's plan).

One thing to note: the proceeds from these accounts are only tax-free if they are used for educational purposes.

If you take out money for other uses, expect to pay taxes and a ten percent penalty. If needed, the beneficiary of these accounts may be changed.

State prepaid education plans

If you expect your child to attend a state university, a State Prepaid Education Plan may be a good option. This plan allows you to pay the current cost of tuition and guarantees the tuition will be waived when your child attends the state college.

If your child doesn't go to a state school, then you may lose a portion of the money you invested. Since it is often hard to predict where a child will want to go to school, many parents decide against this option.

Coverdell Education Savings Account (ESA)
The Coverdell Education Saving Account is also known as the Education IRA. Similar to 529 plans, these special educational savings accounts allow earnings to grow tax-free. Unlike 529 plans, ESAs have a $2,000 limit per year on contributions and an expiration date - at age 30, if the money is not transferred to a new beneficiary or used for higher education, the beneficiary receives those assets and the account is assessed taxes and penalties.

The money held in an ESA can also be used for K-12 expenses.

In 2010, if Congress does not extend the current limits on the ESA, the plan might change to a contribution of only $500 per year.
Please check with your financial adviser before establishing an ESA.

Grants and scholarships
Nothing is better than free money to help fund your child's education.

Grants and scholarships are usually tax-free and don't have to be repaid. These are offered in limited numbers so it is best to have a backup plan in place.

While investing your money and planning ahead is ideal, a loan may still be necessary to pay the remainder of college expenses. Federal and state loan programs can help.

It's never too late to start saving for college. Contact your financial adviser today to discuss these various options, whether you have an older child or are just beginning to set up a college fund for a young child.

The foregoing article is intended to provide general information about saving for college and is not considered financial or tax advice from Union Bank. Please consult your financial or tax advisor.

Janice France-Pettit is a senior vice president and regional manager for Union Bank, overseeing the Simi Valley, San Fernando Valley and Antelope Valley regions. Her column reflects her own opinion and not necessarily that of The Signal.


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