Planning for Children's Education--529 Plans and Other Vehicles

Published in the Milton Area Chamber of Commerce Newsletter in July 2003

Whether you are a proud new parent, the parent of a high school student or anywhere in between one commonality linking you is financing your child’s education. There are many choices both public and private that parents can utilize to meet their planning objectives. 529 plans, Educational IRA’s, EE Bonds, personal savings, and the Free Application for Federal Student Aid (FAFSA) are some of the most common vehicles used for funding higher education.

529 plans are becoming a very popular method of saving for higher education. Although there are two general types of plans, prepaid and savings, the savings option has received the most attention. These plans are open to everyone and in many cases significant contributions can be made annually. Earnings within a 529 will grow tax deferred as long as they remain in the plan. Furthermore, current tax laws allow distributions for higher education to be tax-free. Even though the money is set-aside for the beneficiary, the donor stays in control of the account.

Education IRA’s were established in 1997 and allow a contribution of $3,000 annually (previously $500) for each beneficiary. Contributions are limited to those making under certain income thresholds, although anyone (Aunt, Uncle, etc.) could contribute to a beneficiary providing the donor is under the current income threshold and the combined annual contributions do not exceed $3,000. The Education IRA account grows tax-deferred similar to a 529 plan, but unlike the 529, the Education IRA is considered an asset of the beneficiary.

The long-time savings vehicle known as EE bonds are also being utilized for college savings. Savings bonds purchased after 1989 with the intention of using them for college expenses may be redeemed tax-free dependent on the parents’ income levels. These investments offer security in the knowledge they are issued by the Federal Government, but they typically have very low interest rates, and if they parents make too much will be taxable.

Parents/Guardians/Students may utilize personal savings for educational expenses. While many parents utilize savings (mutual funds, savings accounts, etc.) as a means to pay for higher education, one must keep in mind that the earnings are taxable annually on these typical non-qualified accounts. Also keep in mind, that the savings a student accrues will be counted in the aid formula more than a parent’s savings. Finally, while this may be a good choice for some, the funds remain easily accessible, allowing one to “dip” into their education money for other means on a penalty free basis.

The Free Application for Federal Student Aid (FAFSA) is the primary means for issuing Federal Aid (Grants / Loans). Many states and universities also utilize the data from the FAFSA to award aid, however, some states/universities may require “extra” applications. Parents and students should consult the office of student aid for filing deadlines as they apply to their school(s) of choice.

Planning for your child’s education can be a complicated and sometimes confusing matter. As with any other financial planning (retirement, investments, life insurance, etc.) the sooner one begins to plan the better. Consulting a financial professional and the office of student aid at the college can help to clarify matters and build a successful future.

Kenneth Ferrone, CFS, CFA , is Chief Investment Officer for Papalia Financial, an advisory firm specializing in the growth, protection and transfer of its clients’ personal and business assets. For more information, contact Ken via e-mail at kferrone@papaliafinancial.com or call 1-800-626-1027.