Key Features of 529 Plans
Contributions in most 529 plans grow entirely tax-free, meaning there are no capital gains taxes paid on them. About half of the states currently offer tax deductions on contributions into their 529 plans.
Anyone, regardless of income level, can contribute to the plan, whether the 529 plan is for their own kids or that of friends or family.

There are two kinds of plans: prepaid and savings. 529 prepaid plans are contracts that you buy to lock in today’s tuition rate at public and some private colleges within a particular state. There are restrictions on using funds in 529 prepaid plans for out-of-state colleges and the impact on financial aid is worse than if you invest in 529 savings plans. 529 savings plans are made up of mutual funds that grow tax-free and can be used for any qualified higher education expenses, meaning tuition, room and board, and other miscellaneous expenses associated with college.

You can invest as little as $25 to open a 529 plan and invest over $300,000 per beneficiary, but not all at once. There are currently over 75 529 plans and over 700 different investment options to choose from, with many well-known fund managers, such as Fidelity and Merrill Lynch.

529 plan costs range from 0 – 2.5% of your assets per year, plus front and/or back-end sales fees if you buy plans through brokers. So if you have $100,000 invested and the expense ratio is 1.5%, you pay $1,500 in that year – standard practice in the mutual fund industry. Selecting plans with lower expense ratios is generally a smart strategy, although how a plan performs also impacts whether that $100,000 grows rapidly or not. The states that govern the plans as well as the 529 plan fund managers receive this compensation for administering the plan and managing your money.

Rebate and tuition discount programs like Upromise, Babymint and Sage Scholars offer parents “kick-backs” of 1-10% on purchases made with affiliated retailers. Such rebates may be invested in specific 529 plans.

Key Features of Coverdell Education Savings Accounts
A Coverdell ESA (formerly called an Education IRA) is the most attractive way to save for K-12 or higher education expenses, including UGMA/UTMAs and mutual funds. However, there are income requirements that preclude some upper income families from participating.

Coverdell ESAs, in addition to tuition, covers transportation costs and uniform expenses. Additionally, Coverdell funds may be used for items such as computers and academic tutoring for children in grades K-12 at both public and private schools, in addition to tuition, fees, books, supplies, room and board for college. Another benefit of Coverdell is the added discretion that the account holder has over the investment direction of the funds in the account, which can be more freely allocated among stocks, bonds and mutual funds.

Coverdells have certain provisions that prevent some from participating. Among them is the fact that the $2,000 maximum contribution applies to both the account holder and the beneficiary. In practice, the beneficiary can only have a total of $2,000 contributed to his or her account in any given year, regardless of the number of contributors to that account. In addition, the account holder can only make a maximum contribution of $2,000 per beneficiary.

Excerpted from articles written by Jim Boyle, President of College Parents of America

That being said, you also have to consider the benefits of higher education – both financial and otherwise. The College Board reports that typical college graduates earn up to 60% more over their lives compared to high school graduates. There are more than financial benefits, too – individuals with college educations are healthier, exercise more and smoke less. In addition, the study found that society benefits more from a population with a postsecondary education, with higher voter turnouts, lower unemployment rates, and even a lift in wages of workers with lower education levels in metropolitan areas with higher overall education levels.

A few facts to consider:

• The average tuition for a four-year private school in 2006-07 was $22,218 and a four-year public school was $5,836.*
• The average surcharge for an on-campus room and meal plan at a four-year school in 2006-07 ranged from $6,960 to $8,149.*
• The average amount spent on books and other supplies in 2006-07 was over $900.*
• The average transportation cost for students in 2006-07 ranged from $722 to $1,224. Expenses could include public transportation, gas, car insurance, maintenance, parking fees, and travel home for breaks and holidays.*
• The average amount spent on personal expenses in 2006-07 ranged from $1,277 to $2,048. These could include lab fees, athletic fees and equipment, club, sorority or fraternity dues, study abroad expenses, medical expenses, and emergencies.*

These ranges are helpful, but it can be hard to use them to determine what college is really going to cost for you or your son or daughter. It is often hard to get a sense for the total cost because there are so many items that add up to the complete sticker price, and then there are a number of other factors (scholarships, discounts, a part-time or work-study job) that – thankfully – lower that number to the real price paid by a family.

Start your math by finding each of your prospective school’s published expenses for Tuition & Fees and Room & Board. Search on the school’s website or look around the Financial Aid Office’s website. Look for an itemization of the incidental costs (and apply your own judgment to the school’s estimates).

Some things to consider when you break down those incidental expenses:

• Some schools list average costs for travel that might not consider how far you really have to go, or how often you will go home. A student who can bum a ride with a friend and chip in $50 for gas certainly will pay less for one trip than the one from Hawaii who goes to school on the mainland. Going home more often is obviously more expensive, no matter how you get there.

• Speaking of driving, having a car on campus is very expensive. Gas, maintenance, and insurance are just some of the additional costs. Many schools with parking restrictions don’t allow first-year students to have a car at all. If you go to school in a place with a premium on parking, you might also have to pay for a permit or garage fees – or parking tickets. Look into public transportation and shuttle buses for when walking isn’t feasible. Riding a bike to and around campus is a great way to save money and stay in shape (just make sure you have a helmet and a light)!

• Consider your meal plan options. Some plans force you to use the balance before the end of each year or semester while others are more flexible. It’s hard to know how often you’ll hit the campus cafeteria before you get there, but know that even if you live in a dorm, you will likely have access to a kitchen where you could prepare your own, inexpensive meals.

• Personal expenses can also add up. Keep room in your budget for things like medication, laundry, haircuts, clothing, and phone bills.

• Don’t forget to include some extra funds for having fun. Extra-curricular activities and sports aren’t always free – consider the cost of fees or dues, athletic equipment, uniforms, travel, or tickets for performances.

Most college guidebooks include Tuition & Fees and Room & Board; some will add it all up. Try to find the itemized accounting, and add up the numbers yourself. That total is as close to a reasonable expectation of the entire cost of college as you can get. Check what academic year for which the data is provided – if it is the current year’s cost, add 5% as a reasonable expectation of next year’s cost. If you’re really ambitious, go ahead and run a four year calculation, increasing the cost by 5% or so each year.

* Source: The College Board Trends in College Pricing, 2006.

This is a very large topic with numerous publications and web sites devoted to helping families navigate through its complexities. Here, we will offer guidance on how to organize an effective financial aid strategy.

Assuming you are among the 75% of American families that cannot pay the cost of college without assistance, you should increase the time you spend on the subject of paying for college to be more in line with the time you spend on the admission process.

When a student has set his sights on attending one of the 400 or so competitive colleges, admission preparation is extensive – taking hard courses, studying for standardized exams like the SAT, meeting with the guidance counselor, making college visits, finalizing a list, and completing the applications.

In contrast, what does a family do to prepare financially?

Typically they look up the requirements for the aid application, struggle with filling out the forms, wait for the college to send an award letter, and choose a college without a clear understanding of what their bottom line cost will be.

Taking only the most basic steps to do what is necessary to get an aid decision is not good college financial planning. We recommend that you get more “on top’ of the process by doing some or all of the following:

• Run a financial aid estimator to see approximately how much the need formula will expect you to pay — your Expected Family Contribution (EFC).

• Compare this EFC estimate to the Cost of Attendance at your colleges to judge if you might “demonstrate need” and therefore qualify for financial aid. [If not, you should plan to pay the college bill from your own resources or look into non-need based help such as merit scholarships and student and parent educational loans.]

Assuming it is likely that you will qualify for aid, you should:

• Learn generally how financial aid works (by reading the rest of the articles on this site or researching online – a great place to start is the Department of Education’s website called Student Aid on the Web – www.studentaid.ed.gov).

• Carefully review the aid policies, application requirements, and deadlines of each college on your list.

• Start an aid file containing this information for each school. Later on, this file will contain copies of the aid applications and other relevant material.

• At a minimum, for your top 1 or 2 colleges, plan to have a personal discussion with an aid counselor. Your initial EFC calculation and need estimate is only a starting point. Colleges have their own aid policies that can affect your need estimate by, in some cases, thousands of dollars. You should find out more about how these policies are likely to change the amount of aid you will receive before the award decision is made.

• Once you have learned more about your probable need level, ask about how the college “packages” aid. In other words, how they combine grant, loan, and work-study. There can be large differences in the “quality” (the larger the grant, the better) of an award among different colleges.

• Keep looking for an available merit aid, within or outside the college.

You should educate yourself as a financial aid consumer and not let the process go on without your involvement or understanding.

The purpose of gaining this “aid education” is to learn more about how much you will be asked to pay for college before the college list becomes final. (There may be some modification of the original list based which of the colleges is affordable.)

It is important that you acquire enough knowledge about aid to prevent an unpleasant surprise — getting admitted to your “school of dreams” and finding you are unable to attend for financial reasons.