Passing the College Test

In the United States, attending college has shifted from a privilege for a relative few to an expected rite of passage to adulthood. An estimated 17.6 million U.S. students will attend college during the 2006?2007 school year. That's more than a 40 percent increase compared with 25 years ago.¹

So it follows that paying for a college education has become one of those financial milestones that most parents need to prepare for ? somewhere between buying the family home and saving for retirement.

Fortunately, there are some tax-advantaged vehicles to help families accumulate money for college.

Coverdell Education Savings Account: An ESA is a popular alternative for college savings. Up to $2,000 can be contributed per child (under age 18) every year. Funds accumulate tax deferred, and withdrawals are free of federal tax if used for qualified education expenses. ESAs also offer investment flexibility, allowing investors to choose their own investments.

Section 529 savings plan: This state-sponsored plan allows families to save for future higher-education costs. Contributions are made with after-tax dollars, but any earnings grow tax deferred. The contribution rules are also less restrictive than ESAs. Withdrawals are tax-free if used for qualified higher-education expenses (tuition, fees, room and board, and supplies). For withdrawals not used for qualified higher-education expenses, earnings are subject to income taxes at the owner's rate plus a 10 percent federal tax penalty.

As with other investments, there are generally fees and expenses associated with participation in an ESA or a 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments.

The tax implications of a 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.

Before investing in a 529 savings plan, please consider the investment expenses, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing.

College can be a valuable investment for the children in your family. Taking advantage of the available college funding options may be a good way to get an early start on your homework.

1) U.S. Census Bureau, 2006

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