529,Other Plans Offer Helping Hand For College Dreams

Augusta Chronicle
April 19, 2009

The economy has declined, but this hasn't changed your child's dream of attending college.
The price tag of a college education continues to grow each year, and families need to plan ahead. Though times are tough, families should continue to save, said Chuck Penuel, the director of the Path2College 529 Plan for Georgia.
If you're already saving, don't change your habits, college savings experts say.
"Obviously, this is something that is kind of unprecedented, so every type of savings has been affected. This market shouldn't cause people to quit saving," Mr. Penuel said.
It's also important to start saving early, said Scott Malyerck, the deputy state treasurer for South Carolina, whose office manages the Future Scholar 529 College Savings Plan.
"A lot of people don't think about saving until the child is applying for college. It's kind of late at that point," he said.
EACH STATE HAS A 529 plan, a federal tax code designation that offers tax advantages to encourage families to save for future education expenses, Mr. Penuel said.
"Your taxes are deferred as your account grows. When you withdraw the money for college expenses, those withdrawals are also tax free," he said. "You can use the dollars that you've saved and earned returns on over the years for any qualified college expenses: tuition, room and board, fees, computers."
Participants aren't locked into the account, so if they need to withdraw money for other expenses, they will simply pay taxes on the nonqualified withdrawal.
Anyone can enroll in the plan and select the beneficiary of choice. The funds also can be used for graduate school.
Mr. Malyerck recommends that families visit savingforcollege.com to compare each state's plan.
South Carolina's plan is among the top four in the nation, he said, and it doesn't require participants to be South Carolina residents. The money can be used at any college nationwide. Parents can start an account with as little as $250.
Parents can transfer the funds to another child or an adult who is going back to school. Participants can either have a financial advisor set up their account or they can do it themselves, Mr. Malyerck added.
There are other benefits to such a plan.
"If you're a South Carolina resident, you get a state tax deduction on money you put into the program," Mr. Malyerck said.
Georgia also offers a state income tax deduction up to $2,000 for each beneficiary for whom they have an account. Participants don't have to be Georgia residents, and enrollment in the plan is open all year, Mr. Penuel said.
There are many investment options for 529 plans, such as the age-based option, which manages investments based on the child's age. If the child is young, parents can invest more heavily in stocks, which earn more but are riskier investments.
As the child ages, the money is rolled over to more conservative investments, such as bonds or money market funds.
Other options range from pure stock market investments to guaranteed investments, which guarantee the principal and a minimum rate of interest, Mr. Penuel said.
When comparing the plans for each state, it's important to pay attention to fees, he said. Georgia's plan has low fees, as low as less than half of one percent per year of your account value.
"Some plans are considerably more," Mr. Penuel said.
PREPAID TUITION plans allow parents to purchase tuition at today's prices for later use.
Georgia and South Carolina have chosen to close enrollment for their plans. That's because prepaid plans have become burdens for states because investment earnings are down and college tuition rates keep increasing, Mr. Malyerck said.
"Our program is closed for new people, which many states have done. Some states have just done away with the program," he said.
There are only about 18 prepaid tuition plans nationwide, Mr. Penuel said. The 529 savings plan, however, is more flexible and provides "a wider range of use for your money and lets you control what you spend it on."
FAMILIES HAVE OTHER college savings options, said Richard Borin, a college financial planner with Los Angeles-based College Connections, which counsels students nationwide.
"Retirement accounts are a terrific way to save for college and make your children understand the value of money and work for some money," Mr. Borin said.
When a child turns 10, parents can give them a job around the house and pay them a reasonable amount. They should put the money in a retirement account in the child's name, such as a Roth IRA, which Mr. Borin considers to be the best option.
"A Roth IRA can basically do the same thing as a 529," he said.
They are beneficial because if parents take the money out for educational expenses, they will not be penalized, he said.
"Families that have their own businesses are the ones that can best come up with strategies to reduce the costs of college," he added.
They can have the child work for the business and pay them "what you normally would have received." The child won't have to pay taxes because he or she has a tax credit, he said.
Parents also could open trust accounts through the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act, which they can control.
"There are bonds that are meant specifically for education, such as a series EE United States savings bond," Mr. Borin said.
The EE bond guarantees a certain amount over a period of time. There is also a series 1 U.S. Savings Bond, in which the interest rate keeps up with inflation.

By LaTina Emerson