A College Planning Timeline to Help You Pay


Don't Save in Your Child's Name. A reminder to keep the money in your name, even if means a larger tax bill - at least if you harbor hopes of getting need-based aid. The federal aid formula takes 35 percent of assets in the child's name versus only 5.6 percent (after exclusions) of those belonging to the parents. Trusts are no good either. The only caveat is to watch Congress in the years ahead. The rules may change.

Avoid the Education IRA. It's a lousy deal in its current form. It allows parents to put away up to $500 in an account where the earnings are tax free if used to pay for education, but it doesn't allow use of the funds in the same year as a Hope Scholarship or Lifelong Learning tax credit. Just as bad, these funds may be considered student assets - and thereby run afoul of the 35 percent rule for funds held in the student's name. Stay tuned to see if changes are forthcoming.

Be Wary of Pre-Paid Tuition. About 40 states either have, or are considering, accounts that allow parents to lock in tomorrow's tuition at today's prices. Thay may sound good, but now that annual tuition hikes have slowed to the 5 percent range, the deal is unlikely to be a good one for parents with more than five years before the tuition bills.

A better idea than either of the later two is to investigate a new kind of account being developed by a number of states know as savings trusts or 529 accounts after the section of the tax code permitting them. The accounts allow tax-preferred savings with much higher deposit limits than the Education IRA. They're a new idea brought forth by recent changes in the tax law that is rapidly gaining momentum.

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