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Cents and Sensibility

BY GUY STEELE

Options for college
savings plans growing

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Question: I'd like to start saving for my child's college education. What advice can you give me?

Answer: To give you an idea of how quickly education costs are increasing, at the University of Hawaii, tuition, room and board and other fees total about $8,090 a year for Hawaii residents. If your child or grandchild doesn't begin college for another eight years, when he or she enrolls in 2010, college costs are estimated to be $13,900. This assumes costs will rise at 7 percent each year.

For years, investors have been using savings bonds, zero coupon bonds and growth-and-income mutual funds to help with educational expenses. These are all excellent ways to save for a college education. Thanks to Congress, however, parents and grandparents now have another option to help them earmark money for a child's education.

Coverdell account

The Coverdell Education Savings Account (Education IRA) can be set up by anyone who is interested in setting aside dollars now to pay for future higher education expenses.

The annual contribution limit to the education savings account is $2,000. Once it's established, anyone can contribute to the account as long as he or she meets the adjusted gross income limits. For a single tax filer, the phaseout range is from $95,000 to $110,000 to be able to make contributions. Married couples who file jointly must have income lower than or between $150,000 and $160,000.

Eligible education expenses covered by the account include tuition, fees, tutoring, special needs services, books, supplies, computer equipment, room and board, uniforms, and transportation.

529 Plan

You can establish a 529 plan for your children or grandchildren. And you can choose from two types of this plan:

Prepaid tuition programs; in which you buy future tuition credit at today's prices at an in-state public school.

Savings plans; under which your earnings are not taxed as they accumulate. Distributions for qualified higher education expenses will be federally income tax free.

Of the two arrangements, the savings plan is far more popular because it doesn't restrict students to certain colleges in specific states, as does the prepaid tuition plan.

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Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com