Planning for college can leave you with a lot more questions than answers. Whether you're the parent of a child attending college or an adult returning to college, the FAQs below can help.

• Should I open a Coverdell education savings account?
• Should I save for college in my name or my child's name?
• Do Series EE bonds offer any special advantages if used for college savings?
• How can we possibly save for retirement and our child's college education at the same time?
• What is the CollegeSure CD?
• Can an UGMA/UTMA account reduce my child's financial aid for college?
• Should I use my 401(k) to fund my child's college education?
• What is the college inflation rate?
• How can my child find scholarships for college?
• Can we negotiate our child's financial aid award?
• Are there any assets that are not counted for financial aid purposes?
• How will I ever pay off my student loans?
• My child is heading off to college this fall. What insurance issues do this raise?
  
  

A Coverdell education savings account can play an important part in your college savings program. Once an account is open, you can contribute at any time during the year, and you even have until April 15 of the following taxable year to make a contribution for the current taxable year. In addition, contributions can be made by an entity, including a tax-exempt entity, on behalf of a selected beneficiary.

The main benefit of Coverdell ESAs is tax related. Specifically, money you withdraw to pay your child's college education expenses is completely tax free, including earnings. (Generally, distributions are tax free if they are not more than the beneficiary's education expenses for the year.) Coverdell ESAs have many favorable features:

• You can contribute up to $2,000 per year for a selected beneficiary.
• You can use Coverdell ESA funds to pay elementary and secondary school expenses.
• You can contribute to both a Coverdell ESA and a 529 plan (prepaid tuition plan or college savings plan) in the same year for the same beneficiary.
• You can claim either the Hope credit or the Lifetime Learning credit in the same year you take a tax-free distribution from a Coverdell ESA (though the expenses paid with the Coverdell ESA distribution can't be the same expenses used to qualify for the credit).

Before you consider opening a Coverdell ESA, though, you'll have to meet certain income limits. Single filers must have a modified adjusted gross income (MAGI) of $95,000 or less to make the maximum $2,000 contribution, and joint filers must have a MAGI of $190,000 or less. A partial contribution is allowed for single filers with a MAGI between $95,000 and $110,000, and for joint filers with a MAGI between $190,000 and $220,000.

Copyright 2003 Forefield, Inc.

There is no right or wrong answer, just different consequences. Generally speaking, there are three potential drawbacks to saving in your child's name--the kiddie tax, the financial aid rules, and control issues. On the plus side, saving in your child's name can result in some tax savings, especially if your child is age 18 or older.

First, the kiddie tax. At one time, saving money in a child's name was recommended because of the tax saving opportunities that resulted when children were taxed at their own rate. However, Congress partially closed this loophole some years ago with passage of the kiddie tax. The kiddie tax applies to children under age 18. This rule makes all unearned (i.e., investment and savings) income over a certain amount subject to tax at their parents' rate. Specifically, for children under age 18, the first $850 of investment income is tax exempt, the second $850 is taxed at the child's rate, and any additional amount over $1,700 is taxed at the parents' highest tax rate.

If your child is under age 18 and you want to avoid the kiddie tax, choose tax-free or tax-deferred investments in which the annual expected income does not exceed the threshold amount of $1,700.

If your child is age 18 or older, the kiddie tax does not apply. The first $850 of investment income is tax exempt, and any additional amount is taxed at the child's rate. The advantage of this is that typically, your child's tax rate is lower than yours.

Keep in mind that certain financial aid rules come into play when your child holds an asset and is about to apply for financial aid. The federal government's formula for financial aid treats a child's assets differently than a parent's assets. Under current rules, a child must contribute 35 percent of his or her assets to college costs each year, whereas parents must contribute 5.6 percent of their assets each year (note: the 35 percent contribution figure for student assets is set to decrease to 20 percent beginning July 1, 2007). For example, $10,000 in your child's bank account equals a $3,500 contribution from your child, but $10,000 in your bank account equals a $560 contribution from you.

So the more assets a child has, the more he or she will be expected to contribute to college costs, and the less financial aid he or she will receive, because the financial need is less. However, obtaining less financial aid is not necessarily a bad thing. The average financial aid package consists mostly of loans, so by paying more up front, chances are you or your child will just incur less debt, as opposed to losing grants and scholarships (which do not have to be repaid).

Finally, there is the control issue. Many parents open a custodial account for their child (UGMA or UTMA) as a way to save for college. However, when the child reaches the age of majority (18 or 21, depending on the state), he or she gets full control over the money in the account and can use the money for anything--college, or perhaps a backpacking trip to Europe. Make sure you are willing to relinquish this control to your child.

Copyright 2003 Forefield, Inc.

Yes. Series EE bonds (which may also be called Patriot bonds) are generally inexpensive, low-risk investments whose earnings are exempt from state and local taxes. In addition, in the college savings game, the interest earned by Series EE bonds (and Series I bonds) may be exempt from federal tax if the following requirements are met:

• The bond must be issued in the name of one or both parents (not the child's name), and the owner of the bond must be at least 24 years old
• The bond proceeds must be used to pay qualified higher education expenses (generally tuition and fees, not room and board)
• The bond must be redeemed (cashed in) by the owner in the year it's used to pay the qualified education expenses of the owner, the owner's spouse, or their child
• You must file a joint tax return if you're married
• You must fall under established income limits (these limits are adjusted annually for inflation)

If you meet these requirements, you'll pay no federal tax on the interest earned by the bond when you cash it in. This saved amount can then be applied to the college bill.

However, despite this potential tax advantage, Series EE bonds have relatively low growth potential in an arena where it's crucial to keep up with annual college cost increases.

Copyright 2003 Forefield, Inc.

It's seldom easy to achieve a balance between saving for your retirement and saving for the ever-increasing costs of a college education within your present income. Yet it's imperative that you save for both at the same time. To postpone saving for your retirement means missing out on years of tax-deferred growth and playing a near-impossible game of catch-up. To accomplish both goals, you may need to compromise.

The first step is to thoroughly examine your funding needs for both college and retirement. On the retirement side, remember to include the estimated value of any employer pension plans, as well as your Social Security benefits. This evaluation will likely prompt you to examine some deeply held beliefs about your financial goals. For example, is it important that you travel regularly in retirement, or is it more important that your child attend a prestigious Ivy League college?

If you discover that you can't afford to save for both goals, the second step is to consider some compromises:

• Defer your retirement and work longer.
• Reduce your standard of living, now or in retirement.
• Increase the family income by seeking a better paying position in your present career, getting a second job, or having a previously stay-at-home spouse join the work force. Beware, though, of potential drawbacks like day-care costs, commuting costs, and tax disadvantages on the increased income.
• Seek out more aggressive investments (but beware of the risks).
• Expect your child to contribute more money to college. Some parents may find it difficult to accept, but the majority of college students finance a portion of their education with student loans.
• Investigate less expensive colleges. You may find that some less expensive state universities have more to offer in certain programs than their pricey private counterparts.

The third step is to re-evaluate your plan from time to time as your circumstances and wishes change. Remember, the important thing is to earmark a portion of your present income for both goals and do the best you can.

Copyright 2003 Forefield, Inc.

The CollegeSure CD is an FDIC-insured certificate of deposit (CD) with an interest rate that is tied to the annual increase in college costs. The interest rate adjusts annually on July 31. The CollegeSure CD is offered in terms of 1 to 22 years. The term you choose usually coincides with the number of years until your child enters college.

CollegeSure CDs are sold in whole or partial units. A unit is simply a measure of the portion of college costs you have prepaid. At maturity, each whole unit is guaranteed to pay the average cost of one year of tuition, fees, and room and board at a four-year private college. This guarantee assumes interest and principal remain on deposit until maturity. If you choose to purchase only a partial unit, at maturity it will be worth only a portion of the average yearly college cost. Because the interest rate varies annually, a CollegeSure CD might provide a better return than a traditional bank CD or Series EE government bond.

As a CD, interest earned on the CollegeSure CD is taxable, and an early withdrawal penalty applies. However, if your child decides not to go to college, you can get the entire principal and interest back when the CD matures and use it for any purpose.

The CollegeSure CD is offered only by the College Savings Bank in Princeton, New Jersey. For more information, call the College Savings Bank at (800) 888-2723.

Copyright 2003 Forefield, Inc.

It can, but in the same way that any other asset held by your child can. An UGMA/UTMA account is a custodial account established at a financial institution for a minor child and managed by a parent or other designated custodian. It is established under either a state's Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).

Because an UGMA/UTMA account is held in your child's name, it is considered your child's asset. The federal government's financial aid formula treats your child's assets differently than your assets. Under the current federal formula, children must contribute 35 percent of their assets to college costs each year before any financial aid is forthcoming, while parents must contribute only 5.6 percent of their assets (note: the 35 percent contribution figure for student assets is set to decrease to 20 percent beginning July 1, 2007).

For example, $10,000 in your child's UGMA/UTMA account would result in a $3,500 required contribution from your child. The same $10,000 in your bank account would result in a $560 required contribution from you. That is, you must contribute this amount before your child is eligible for any financial aid.

As a result of this formula, any asset that your child holds, including an UGMA/UTMA account, will always translate into a higher monetary contribution to college costs than if the same asset were in your hands. It follows that the more money your family is required to pay up front for college costs, the less financial aid your child will receive. And even though your child will be entitled to less financial aid, that may not be such a bad thing. The main component of the average financial aid package consists of loans that must be paid back. The more money your child pays for college up front, the fewer loans you or your child will have to repay.

Copyright 2003 Forefield, Inc.

You can, but it isn't your best option. Your 401(k) plan should be dedicated primarily to your retirement.

There are two primary drawbacks to using your 401(k) for college funding. First, if you withdraw funds from your 401(k) before you are 59½, you may owe a 10 percent premature distribution penalty on the withdrawal. This penalty is in addition to income taxes you will owe on the withdrawal. Second, frequent dips into your 401(k) reduce the amount of money you ultimately have available to reap the benefits of compounding and tax deferral. This, in turn, reduces the overall funds for your retirement.

If you really need to use your 401(k) to pay for college, a better option might be to borrow from it if your plan allows loans. Plan loans are not taxed or penalized, as long as you repay the funds within a specified time period. But make sure you compare the cost of borrowing college funds from your plan with other finance options. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years. In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.

If you want to save for college in a retirement vehicle, consider using a traditional IRA or Roth IRA instead. With these IRAs, you will not owe the 10 percent premature distribution penalty on withdrawals you make before age 59½, as long as the money is used to pay your child's qualified college expenses. If you have some time to plan your child's college fund, you might consider a Coverdell education savings account or a 529 plan established and maintained by a state or eligible educational institution. Each of these vehicles is specifically geared to college investors and offers numerous tax advantages.

Copyright 2003 Forefield, Inc.

The college inflation rate refers to the annual increase in college tuition and fees, similar to the way that the general inflation rate refers to the annual increase in the cost of living. The college inflation rate is usually measured separately for public and private colleges. For the 2006/2007 academic year, tuition and fees at four-year public colleges rose an average of 6.3 percent, while tuition and fees at four-year private colleges rose an average of 5.9 percent. Over the past decade, tuition and fees at four-year public colleges have increased at an average rate of 6.9 percent, while tuition and fees at four-year private colleges have increased at an average rate of 5.7 percent. (Source: The College Board's Trends in College Pricing Report 2006.)

For parents trying to keep up with their child's college fund, it's important to choose investments for college savings that keep pace with college inflation. You can use the college inflation rate for a given year or the average rate of inflation over the past decade to help project college costs in the future. Be aware, however, that the more years your child has to go until college, the greater likelihood that your cost estimate will need to be revised at a later date.

Copyright 2003 Forefield, Inc.

Scholarships are definitely a preferred type of financial aid because they do not have to be repaid. Consequently, they reduce your out-of-pocket costs for college.

There are basically two types of scholarships--those awarded solely on the basis of talent (often called merit scholarships) and those awarded on the basis of talent and financial need. These scholarships can come from two sources--the colleges you are interested in and everywhere else.

First, the easy part. Have your child check with the admissions office at each college he or she is interested in to find out what scholarships it offers. Recently, colleges have tended to offer more merit scholarships, without consideration of financial need, as a way of attracting the best and brightest students. The admissions office may then direct your child to a specific department or contact person, depending on whether his or her talent is musical, athletic, or academic.

Besides the colleges your child is interested in, the scholarship world is wide open. Virtually thousands of scholarships are offered each year by the federal government, individual states, and a wide variety of local, state, and national organizations. Although it is impossible to research them all, a tailored search is possible.

Have your child ask his or her high school guidance counselor or the reference librarian at your local library to recommend an up-to-date scholarship handbook. Better yet, go on-line to one of a number of websites that perform scholarship searches for free. Such websites can save you a tremendous amount of time because they automatically exclude scholarships that don't match your qualifications, background, and interests.

If your child finds a handful of appropriate scholarships, the next step is to follow each one's instructions and apply by the required deadlines. Most scholarships require an essay, a grade transcript, a description of extracurricular activities, and recommendation letters.

Finally, a word of caution. Only a small percentage of the average student's overall financial aid package consists of scholarships. So, while scholarships are certainly worth researching, such research should not be at the expense of filling out the federal government's financial aid form (the FAFSA) or any applicable college or state financial aid forms.

Copyright 2003 Forefield, Inc.

In some cases, yes. If you decide to appeal all or part of the award, follow the instructions in the award letter. In most cases, this will involve a polite business letter to the financial aid administrator (FAA) and a follow-up telephone call or meeting. Because the FAA may handle a number of similar requests, it's important to clearly label your correspondence. You should also be persistent in following up on your request, but not to the point of being a pest.

The FAA has authority to exercise "professional judgment" to reduce the loan component of your child's aid package and/or increase the scholarship, grant, or work-study component. Your chances of successfully renegotiating your child's aid package are best in two situations.

The first situation is if you have any special circumstances that affect your ability to pay your expected family contribution (what the federal government's financial aid form says you can afford) or any additional shortfall (the difference between your child's financial need and what the college offers in its aid package). Examples of special circumstances include the disability of you or your spouse, a recent job loss or prolonged unemployment, unusually high medical expenses, long-term care costs for an elderly relative, or some other situation that puts above-average constraints on your current income and savings. By contrast, a general plea of an inability to pay will likely fall on deaf ears--most parents make financial sacrifices to send their kids to college. If you have a special circumstance, you should provide written documentation to the FAA.

The second situation is if your child has been accepted at two direct competitor colleges, and one has offered a more generous financial aid package than the other. This strategy works best with direct competitors. Although many colleges don't care if they lose an applicant to a more (or less) selective college, they generally don't like to lose an applicant to a direct competitor. In this case, you might contact College A and inquire if it could possibly match the amount of grants, scholarships, and/or work-study that College B offers. Of course, your child must have the qualities that College A is looking for.

Underlying your success in either situation will be the principle of supply and demand. Your chances will be best in the years when colleges are vying for limited applicants, as opposed to the years when applicants outnumber the available college slots. Your child's high school guidance counselor should be able to give you an idea of the competitiveness of any particular college year.

Copyright 2003 Forefield, Inc.

Yes, assuming you are talking about federal financial aid. Under the federal government's financial aid formula, four main types of assets are excluded from consideration when determining your child's financial need:

• All retirement accounts (e.g., IRAs, 401(k)s, 403(b)s, Keoghs)
• Home equity in a primary residence
• Annuities
• Cash value life insurance

These assets are known as nonassessable assets. All other assets that belong to you and your child are known as assessable assets and include items like checking and savings accounts, stocks, bonds, mutual funds, custodial accounts, trusts, and investment property. The more assessable assets you have, the more money you will be expected to contribute to college costs before any financial aid is forthcoming.

For example, Mr. and Mrs. Green have a Roth IRA worth $50,000, home equity of $25,000, cash value life insurance of $100,000, and a mutual fund worth $25,000. Their total assets are $200,000. However, under the federal financial aid formula, the Greens are considered to have only $25,000 worth of assets (i.e., the mutual fund).

By contrast, Mr. and Mrs. White have stock holdings worth $50,000, a mutual fund worth $25,000, a custodial account in their child's name worth $25,000, and home equity of $100,000. Their total assets are $200,000. However, under the federal financial aid formula, the Whites are deemed to have $100,000 worth of assets (i.e., stock holdings, mutual fund, and custodial account).

Keep in mind that financial aid programs that are funded by individual colleges may use a formula that differs from the one used by the federal government to determine financial need. Specifically, the formula may take into account the value of your retirement accounts and/or home equity, and may even expect you to borrow against these assets.

Copyright 2003 Forefield, Inc.

As the cost of post-secondary education continues to increase and you take on further student loan indebtedness to pay for it, you may feel as if you are leaving the ivory tower with a mortgage on your back. You may be surprised to discover that some or all of your indebtedness can be forgiven if you are employed in certain public-service sectors, teach in teacher-shortage areas, or go into the Peace Corps.

If these choices aren't available to you, you must find a way to budget for your student loan payments. Review your household income and expenses. Can you reduce your spending on entertainment, luxuries, and discretionary items? If so, you can divert these saved funds toward monthly principal prepayment of your student loans, thus shortening the overall repayment term and saving on interest charges. You are always permitted to prepay the principal of student loans, partially or in full, without penalty.

Would consolidating your loans or refinancing your loans make the payment schedule easier? Check with your current lender to see what options you might have.

Are you in a position to take on a second, part-time job? The income from this job could be used to reduce your student loan indebtedness. Can you devote a tax refund, gift money, or inheritance to principal prepayment? Even infrequent payments of this sort will ultimately reduce your loan balance and save you both time (repaying the debt) and money (the interest on the debt).

Copyright 2003 Forefield, Inc.

As you send your child off to college, you probably have a lot of things on your mind, such as whether your child will eat right and get enough sleep, how to pay tuition, and what to do with that empty bedroom. And although insurance may seem like a low priority, there are some important issues you should consider.

As for health insurance, your medical plan will probably cover your child until he or she is between 20 and 24 years of age, as long as he or she still meets the definition of student. But if the plan is an HMO and your child's college is far from home, accessing an approved provider may prove difficult. An alternative is to purchase health insurance coverage through your child's college. Many colleges and universities offer low-cost health insurance for students. However, be sure to check the maximum coverage limits on school-subsidized health insurance carefully. They are generally much lower than your own policy, which is one reason the college plan is less expensive.

If your child will be living in a dorm or other university housing, his or her personal property will typically be covered under your homeowners insurance policy. However, you may want to check your policy for coverage limitations on certain items (e.g., computers and stereos). If your child moves out of the dorms and into an apartment, his or her personal property will usually no longer be covered under your policy. In that case, he or she should purchase a renters insurance policy to cover his or her possessions.

If your child will be taking a car to school, make sure that the car is properly insured. If the child owns the car, the insurance policy must be in his or her name. If the child is "borrowing" a family car, he or she must be listed as a driver on the insurance policy. Some insurance companies may require the child to be listed as the primary operator, since the car is in the child's possession and not the parents'.

Copyright 2003 Forefield, Inc.