If you're raising a budding Albert Einstein
but don't think you can afford to send him to college, then
you might want to put a college education on lay-away. That's
right, pay now, enroll later.
More than 1 million future collegians
are already enrolled in qualified state tuition programs,
representing an investment of more than $3 billion from their
parents. Forty-four states currently have programs under way
and the remaining states have legislation pending or under
consideration.
"It's a wonderful way for middle-income
families to prepare for college costs," says Marshall
Bennett, chairman of College Savings Plan Network, an association
of state college savings programs. "The middle income
have had to use sweat, sacrifice and debt to pay for college,
but now they have some help."
In a nutshell, here's how it works: Anyone
can set up a child's account by contacting the College Savings
Plan Network at their Web
site or toll-free at 1-877-277-6496, and anyone can contribute
to it. (A comparison of available state programs can be found
at Kiplinger's Web
site.)
The contribution cap is about $100,000
for most plans. The money is invested in predetermined ways
by a fund manager, and the asset allocations shift over the
years from more stable investments to more liquid investments
as the child approaches college age.
The donor pays current income taxes on
the contributions, but the earnings are sheltered. The income
tax bill is deferred until the money comes out, then it is
taxed at the child's lower tax rate.
To determine whether the plan is right
for your little one, here are a few commonly asked questions:
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What's
the difference between a prepaid tuition program
and a savings program?
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Prepaid Tuition: You can lock
in today's tuition rates and the program will pay
out future college tuition at any of the state's
eligible colleges or universities (or an equal payment
to private and out-of-state institutions). Amounts
of tuition can be purchased through a one-time lump
sum or monthly installments. The program pools the
money and makes long-range investments so the earnings
meet or exceed college tuition increases in the
state.
Savings Plans: Allow you to save money in
a special college savings account on behalf of a
child. Contributions vary, depending on the individual
savings goals, and the plan offers a variable rate
of return (some offer a maximum rate of return).
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What are the tax benefits?
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Both programs allow earnings to be
federally tax-deferred until the beneficiary enters
college, and earnings are then taxable at a child's
rate. Most states exempt earnings from state income
tax, and some states allow families to deduct the
full or partial amount of their contribution from
their state income taxes. Check with your state
income tax office or your tax attorney.
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Do plans guarantee admission to
college?
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No. Your child will still be required
to meet entry requirements as determined by the
college or university.
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What if my child does not attend
college?
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You may choose to hold the investment
until a later date when the child may decide to
attend college or transfer the benefits to another
member of the child's family. You can also get a
refund, with interest. A refund penalty may be assessed,
except in the event of death, disability or receipt
of a scholarship.
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What if my child receives a scholarship?
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If your child receives a scholarship
that covers the cost of qualified expenses, a refund
can be made up to the amount of the scholarship
without incurring a refund penalty.
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How does this relate to Education
IRAs?
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If a contribution is made to a qualified
state tuition program, then no contribution can
be made to an Education IRA in the same tax year.
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Can funds be used for more than
just tuition?
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Yes. Policies vary from state to state,
but most allow funds to be used for any qualified
expense such as tuition, fees, room and board, books,
supplies and equipment.
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Can funds be used anywhere in the
United States?
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Yes. In both prepaid tuition and savings
plans, your account funds can be used nationwide
at eligible, accredited, two- and four-year public
or private colleges and universities.
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-- Posted: May 4, 1999
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