529 plans offer a way to put aside significant savings for education.

There are a number of ways to save for higher education expenses. Given the substantial amount of money required it pays to start early and enlist the help of others, such as grandparents and relatives, in achieving this goal. For a child born in 2003, planning to attend a four-year public college would need to accumulate $160,341 in 18 years, assuming costs rise at a 6% rate. The monthly savings required to reach this goal would be $506, $412, or $332, assuming 4%, 6%, and 8% returns, respectively. For a private school the amount required could be 2 ½ times as much. Some financing vehicles include scholarships and grants, financial aid, and tax advantaged savings programs. Savings programs include UTMA/UGMA, Coverdell accounts and 529 plans. I will only cover 529 plans here as they have significantly more flexibility and allow greater savings while still being sheltered.

Advantages:
• Can save a substantial amount of money towards higher education
• Owner can change beneficiary if they decide not to go to college or rollover to relative for qualified expenses
• Tax deferred growth
• Tax free withdrawals if used for qualified expenses
• No income restrictions on donor
• Account owner retains control after majority age
• Funds can be owned by child, parent or third party (relatives or others)
• If account is owned by third party, it is exempt from FAFSA reporting
• If the grandparent owns the account, they can withdraw funds in case of medical emergencies
• No time limit on using funds
• Can transfer UTMA/UGMA into 529 plan

Disadvantages:
• Will count as a parental asset when calculating FAFSA - If owned by parent (Reduced to 5.64% from 35% if student owned)
• Some plans restrict investment choices
• Plan costs can be high
• Will count towards Medicaid assets if owner is applying
• Exposure to creditors

Tax considerations:
• Can sometimes get a state tax deduction; Most states give the deduction to the owner - May be valuable if grandparent lives outside Florida
• No income deduction

Estate planning considerations:
• Assets are not subject to probate if a successor is named
• Can take up to five years of gift exemptions in one shot (up to $130,000 for a couple)
• Have ability to take assets out of estate while retaining the ability to revoke or control beneficiary
• Subject to 5 year look back

Considerations:
• Tax penalties, 10% plus recapture of deductions (if any), if withdrawn for non-qualified expenses
• PPA 2006 made tax shelters permanent

Resources:
• www.finaid.com
• www.savingforcollege.com
• IRS Publication 570 - Tax Benefits for Education