The College Savings Game

The Christian Science Monitor reported in 2003 that higher education costs were up 47% at public universities, and 42% at private universities from 1994. It dubbed this astronomical rise the “Tuition Tsunami.” The overarching problem with this substantial increase in higher education costs is that lower to middle class individuals are being squeezed out of the chance to improve their socioeconomic status, and the middle to upper class folks are beginning to experience a budget crises.

The average individual obviously cannot stop this giant tidal wave alone, however, the government has designed some weapons to aid in combating this enemy. As with any enemy your chance of survival is greatest when dealt with earliest. It is unwise and potentially lethal to wait to combat an enemy when he is at the gates. When the watchman on the watchtower spot the enemy miles out is when the time has come to defend the people. The same is true for paying, or helping a child pay for his or her higher education. The time to combat the enemy is now. Procrastinating the initiation of an effective strategy to combat this enemy will only lead to despair and crises.

Thankfully, the government has created a few weapons to aid in the defeat of this enemy. While these weapons are nowhere near perfect, it is better to fight with what you have, then to not fight at all. The primary two weapons the government has created are the state sponsored “529 Plans,” and the federally sponsored “Coverdell Educations Savings Account,” formerly the Education IRA.

The state sponsored “529 Plans” are generally either a tax-free investment vehicle or a pre-paid tuition plan. The tax-free investment vehicle provides tax-free growth at the federal level, and tax-free withdrawals for qualified education expenses. It does not provide a tax deduction at the federal level for the year of contribution, however, many states do provide a deduction on your state income taxes for residents of that state. The pre-paid tuition plan allows parents to lock in current tuition rates; however, it means your child must attend that specific state university. For more information on College 529 Plans click the following link…College 529 Plan Facts.

The Coverdell Education Savings Account is a federally sponsored education savings vehicle that works much like a ROTH IRA. You’re not allowed any tax deduction in the year of contribution, but the earnings grow tax free, and withdrawals for qualified education expenses are not taxed. The drawback to the Coverdell Account is the maximum yearly contribution is capped at $2,000, and begins to phase out for individuals with higher adjusted gross incomes. For more information on Coverdell Savings Accounts click the following link...Coverdell Facts.

Remember the time to fight the tide of rising higher education costs is now.

For additional information click below:

College 529 Links

Coverdell Links

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