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Strategies & Market Trends : College Savings Plans and Strategies -- Ignore unavailable to you. Want to Upgrade?

To: Original Mad Dog who wrote (5)	3/25/2002 3:56:37 PM
From: Original Mad Dog	Respond to of 19

collegesavings.org Frequently Asked Questions What’s the difference between a prepaid tuition program and a savings program? Prepaid Tuition: Essentially, parents, grandparents, and other interested parties may 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 (years or units) may be purchased through a one-time lump sum purchase or monthly installment payments. The program pools the money and makes long-range investments so that the earnings meet or exceed college tuition increases in that state. Savings Plans: Savings plans allow participants to save money in a special college savings account on behalf of a designated beneficiary’s qualified higher education expenses. Contributions can vary, depending on the individual savings goals. The plans offer a variable rate of return although some programs guarantee a minimum rate of return. Which type of plan is better? It depends upon the investment needs and goals of the family. Each state has created innovative college savings programs individually designed to reflect the unique needs of its citizens. The plans represent affordable, flexible, and tax-advantaged options that can ensure the education of our most precious resources ¾ the children of America. Some states are starting to offer their citizens both types of programs, giving families the option to choose the college savings vehicle that is right for them. What are the tax benefits? Both types of programs are "qualified state tuition programs" under the Internal Revenue Code Section 529 (26 U.S.C. 529). This allows earnings to be federally tax exempt beginning January 1, 2002. Click HERE for the information on federal tax exemption. Most states exempt earnings from state income tax, and some states allow families to deduct the full or a partial amount of their contribution from their state income taxes. When your dependent son or daughter uses their qualified state tuition account for college, and your family meets household income requirements, you can claim the new Hope tax credit on your tax return (up to $1,500 each year for the first two years of college; up to $1,000 in Lifelong Learning credits can be claimed in subsequent years). Hope credits can only be claimed against payments for tuition and related expenses (not room and board) and there is an income limitation for eligibility of $40--50,000 for individuals and $80--100,000 for couples filing jointly. Do the plans guarantee college admission for my child? Your child will still be required to meet entry requirements as determined by individual colleges or universities. Can my investment in a qualified state tuition program be used throughout the U.S.? Yes. Generally, in both prepaid tuition and savings programs, your account funds can be used nationwide at eligible institutions. Such institutions generally are accredited two- or four-year public or private nonprofit colleges or universities as well as certain proprietary and vocational institutions. What if my child does not attend college? You may choose to hold the investment in the qualified state tuition program until a later date when the student may decide to attend college, or you may transfer the benefits to another member of the student's family. You may also request a refund, and the account will be refunded according to the program’s policy. By federal law, a refund penalty will be assessed, except in the case of the student's death, disability, or receipt of a scholarship. What if my child receives a scholarship? 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. Funds can also be transferred to another family member, or they can remain in the account for future use. How will participating in a qualified state tuition program affect financial aid eligibility? Any investment is likely to impact a student's eligibility for need-based financial aid. Financial aid treatment of investments changes through the years so it is impossible to know how assets will be treated in the future. In addition, it is uncertain as to how much or what types of financial aid will be available to families in the future. The College Savings Plans Network is actively working to clarify the federal financial aid treatment of the qualified state tuition programs. Is investment in qualified state tuition programs recommended by financial advisors? Many financial planners, tax accountants, and other financial advisors support state plans and recommend them to their clients as a program that may fit their college planning needs. In fact, national investment firms have partnered with various states to introduce college savings plans. Are there restrictions regarding a qualified state tuition program and Education IRAs? Beginning in January 2002, individuals can contribute to both 529 plans and Education IRAs. The Economic Growth and Tax Relief Reconciliation Act of 2001 allows contributions to the Education IRA (now called Coverdell Savings Account) to cover K-12 education expenses on a tax favored basis. Individuals may benefit by funding a 529 plan for the child's college and utilizing the Education IRA for elementary and secondary education. Can funds be used for more than just tuition costs? Yes. While policies will vary by state, most states allow for funds to be used for any qualified higher education expense such as tuition, fees, room and board, books, supplies, and equipment required for enrollment.