Education Planning

Numerous tax breaks and college savings vehicles have emerged in recent years to help make college more affordable for more families. However, the mushrooming number of options—some of which conflict with each other—make the task of deciding which strategies to pursue a frustrating challenge. We can help you weigh and select the best strategies for your situation.

Why save for college?
On average, college provides significant financial advantages, in addition to the direct educational benefits. A college graduate earns an annual average of 62 percent more than a high school graduate, according to the U.S. Census Bureau.

Start saving now
Some families assume they shouldn't save for college because they think it will reduce financial aid. Not a good idea.

First, the vast majority of financial aid these days is in the form of loans, which you and your student must pay back. Thus, it's better from a financial standpoint to save money and earn a return on it rather than borrow that money and pay interest on it later.

Saving also gives you more flexibility. You are less likely to be forced to pick a second-choice school because it has a better financial aid package than your first choice.

Future financial aid might be tighter or unavailable, or current tax breaks may have disappeared. Carefully saved or invested money will be there regardless.

As with any form of investing, time is your ally. The sooner you start to save, the better off you are. Consider cash gifts for your newborn as a great way to jump-start their college fund. If you start early, the power of “compounding” is on your side.

What are some investment choices?
The challenge today is that there are so many options for saving, and one size does not fit all. We can help you weigh and select the best strategies for your situation. Some of the vehicles we can use to implement your college planning strategy include:

• Cash and cash equivalents. CDs, money market funds, short-term bonds or bond funds, and savings accounts are good options when you'll need the money soon for college, within five years or less.
• U.S. savings bonds. The interest earned is free of federal tax if the money is used to pay for qualified college expenses, and if your income qualifies. Be certain to check about issuing requirements.
• Coverdell education savings accounts. You can now contribute up to $2,000 a year to what was formerly called the education IRA, though some income restrictions remain. Earnings are federal income-tax exempt as long as they are used for qualified education expenses, which now include K-12 private school costs.
• Pre-paid state tuition plans. Some states offer programs in which you pay for tuition in advance with the guarantee that tuition costs will be covered when your child enrolls regardless of how much tuition costs climb between now and then. It's a good option for conservative investors or in the event that tuition costs increase dramatically. Theses plans are usually limited to schools within the state and do not include private universities.
• 529 college savings plans. Individual states administer these plans, while the investment management is usually outsourced to an investment firm or mutual fund company. 529 Plans offer some unique features, which vary by state and allow substantial annual contributions. Some plans allow:
  • Investor control when the student reaches the age of majority
  • Tax-deferred growth
  • No income restriction to open a plan
  • No age-limit to open a plan or to start or complete withdrawals
  • Qualified withdrawals are federally-tax free
    **529 plans involve investment risk, including the possible loss of funds. There is no guarantee a college-funding goal will be met. By investing in a Plan outside your state of residence, you may lose any state tax benefits.  Earnings must be used to pay for qualified higher education expenses to be federally tax-free. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient's marginal rate and subject to a 10% penalty. The fees, expenses and features of 529 plans can vary from state to state. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.
• Taxable investments. You can invest in anything you choose—stocks, mutual funds, bonds, real estate—with the potential of earning a higher return than some other college investment options. Income from the assets is taxed at your rate. You can minimize any capital-gains taxes on the investments by gifting the property to your child when it's time for college and have your child sell the property (though you could face gift taxes).
• Roth IRAs. You can choose your investments. Earnings grow tax deferred, and early withdrawals are not subject to penalties if used for college expenses. Earnings are subject to income tax, however.