Financial Aid
Borrowing
Prepayment Plans
Mutual Funds
Federally Guaranteed Savings & Tax Advantages
Tax-Deferred Growth And Peace Of Mind
Specialized Funding Vehicles

Planning Ideas

How we can Help You

Today, a student attending a private university can expect to pay more than $19,000 per year in tuition and fees without including room and board. With college costs continuing to increase at 6-8 percent each year you may want to consider a number of different funding options. Here are a few:

Financial Aid

Financial aid, e.g.federal grants, school loans & college work-study programs, may be available even to high-income families. Your eligibility for financial aid is calculated by subtracting your expected family contribution (EFC) from the cost of the college. Your expected family contribution stays the same, regardless of the college your child attends. E.g. if your EFC is $10,000 and the college costs $13,000 per year, $ 3,000 need is demonstrated.

The EFC is based on both the parents' and child's income and assets. The parents' expected contribution range from 22 percent to 47 percent of income (less allowances for family living expenses and taxes) and a maximum of 5.65 percent of most assets. Students are expected to contribute 50 percent of income and 35 percent of assets. Accumulating savings in a college fund will count as an asset & reduce the aid a student receives, if saved in the student's name. E.g. if you've saved $30,000 in an account in your daughter's name, she will be expected to contribute $10,500 each year. If saved in your name, your daughters expected contribution from that account is only $ 1,695.

Suggestion Reduce child's assets by selling stock 2 years before college and defer all earning until after college years.

Home equity, retirement plans annuities & cash value of life insurance is not included so you may want to consider transferring assets to these categories. Retirement plan deductions are added backed to arrive at earnings. The EFC is halved for each additional child in college. Calculations are made annually.     top

Sy Schnur does college planning which will help you significantly reduce your college outlays. You must speak to us at least two years before your child will attend college.

Borrowing

Gov't assisted loans (Stafford & Perkins loans) are available to students who demonstrate need, at attractive rates. Interest is deferred and not paid to the govt. while student is in school. Repayment starts (including deferred interest) 6 months after graduation. Home-equity loans. The interest you pay may be tax deductible up to $100,000 of home equity debt, which can lower cost of borrowing. You may borrow from certain retirement plans. Interest in not tax deductible, and loan generally requires 5 year repayment.    top

Prepayment Plans

Rather than hassling with college investment fund, some colleges, universities, and state run school systems let you prepay tuition through a single, discounted fee that is pegged to the age of your child. However, an IRS private letter ruling on a State of Michigan prepayment plan suggests a less-than-favorable tax treatment. For starters, prepayment of tuition is a taxable gift that does not qualify for the annual exclusion because it is a gift of future interest. You can still avoid transfer taxes by applying your unified transfer-tax credit. Your child will realize taxable income on the value of the educational services he or she receives, minus the cost of the plan. Carefully evaluate the rebate provisions provided in the event child decides not to attend sanctioned school.

Several arrangements are available that let you realize the tax benefits of income shifting while maintaining some control over the assets. However, if your state considers paying college expenses a legal obligation of parents, income earned on these arrangements will be taxed to you, negating any income tax advantage.

For example, you may be able to set up a custodial account at a bank, brokerage firm, insurance company, or mutual fund. The assets transferred to the account are owned by your child, but the custodian (you or another adult) controls access to the money and oversees its management until the child reaches age 18 or 21 (depending on your state laws).

Be aware that naming yourself custodian and contributing to the account could make the assets part of your taxable estate if you were to predecease your child. Also, gifts made to a custodial account are irrevocable. The child will have unrestricted access to the money upon reaching majority age. Custodial account investment earnings are also subject to the kiddie tax rules. Finally, owning assets may hinder your child's ability to qualify for financial aid.

Transferring assets to your child via a trust provides more flexibility and potential tax advantages, but at a higher administrative cost. When a trust retains investment earnings instead of distributing them to a beneficiary, the trust becomes a separate tax paying entity, which exempts it from the kiddie tax rules.

The Omnibus Budget Reconciliation Act of 1993 significantly compressed the trust income tax brackets so that the higher marginal tax rates are reached faster. However, you can create a trust and establish a custodial arrangement to receive income from the trust so that you benefit from the lower tax bracket of the child rather than the trust.

Section 2503(c) trusts (also known as minors' trusts) can be established for beneficiaries who are under age 21. Transfers to these trusts qualify for the annual gift tax exclusion, even though they are gifts of a future interest. Any assets remaining in a section 2503(c) trust must be distributed to the beneficiary once he/ she reaches age 21. The beneficiary may elect to extend the trust's term. Also, the age 21 payout requirement should not be a deterrent if college expenses will have been paid by this age.

A "Crummy" trust also lets you make gifts that qualify for the gift tax exclusion while providing control over how the trust assets are managed. Unlike a section 2503(c) trust or custodial arrangement, assets do not have to be turned over to the beneficiary at age 21.

Each time you contribute assets to the Crummy trust, the beneficiary must be given a temporary right, usually for 30 to 60 days to demand withdrawal of the contribution. If the demand right is not exercised, the contribution remains in the trust for management by the trustee. Control is available ( you can stop contributing to the trust.) Generally, the demand right results in the trust income being taxable to the beneficiary, which gives rise to the kiddie tax concerns.  top

Mutual Funds

Good foundation for building a college savings fund or nearly any investment objective, for that matter. The money that you invest in a mutual fund is spread among diversified securities, which helps reduce risk. The fund's investment portfolio is actively managed by the fund's professional advisers. Therefore, you don't have to worry about researching specific investments or staying abreast of every market development.

Most funds let you establish an automatic monthly investment program where fixed amount can be transferred from your bank account into fund(s). Preferred if your investment time horizon is seven yrs or more. Consider fixed income funds with shorter average maturities (less than 10 years) if you will need access to funds sooner. Don't overlook the global fund, which seeks investment opportunities around the world. Our investment adviser can help select specific funds to match your goals and risk tolerance.   top

Zero-Coupon

Bonds are tailor-made for college funds. Bonds are sold at a discount from maturity value. Interest compounds and is paid at maturity to help build your education savings fund at end of the bond's term. You can purchase bonds that provide the specific amount you will need on the date you need it to finance your child's education expenses.

Consider the credit worthiness of the issuer. For example, bonds issued or guaranteed by the U.S. Government or one of its agencies all have ratings.

Zero-coupon bonds do not pay interest until maturity, but you must report as taxable income the interest that accrues annually. You can avoid this tax on "phantom income" by purchasing tax-exempt zero-coupon bonds. Some states offer so called "baccalaureate bonds," which are state-tax-exempt zeros marketed especially for educational savings.

Be aware that the trading prices of zeros can fluctuate dramatically with interest rate movements. These fluctuation will not impact you unless you need to sell your bond before maturity.   top

Federally Guaranteed Savings & Tax Advantages

Similar to zero-coupon bonds, Series EE Savings Bonds are sold at a discount from their face value with the accumulated interest paid at maturity. The prevailing interest rate is adjusted semiannually but is guaranteed not to fall below a minimum rate. Interest is exempt from state and local taxes. You may defer payment of federal taxes on accumulated interest until the bonds are redeemed.

You also may qualify for a federal tax exemption on Series EE Savings Bond interest if you purchase the bonds in your name and redeem them in a year in which you pay your child's college tuition. However, the federal exemption is phased out if your modified adjusted gross income exceeds a certain level. No interest exemption is available for joint filers whose income exceeds $90,000 or single filers whose income exceeds $55,000.   top

Tax-Deferred Growth And Peace Of Mind

Insurance companies often promote cash-value life insurance and tax-deferred annuities as college savings alternatives. Both let your money grow tax-deferred and can provide guaranteed payouts to help meet college education expenses in the event of your premature death.

However, withdrawals of investment earnings from an annuity before age 59 1/2 are generally subject to a 10 percent tax penalty. With life insurance, you may be able to borrow from the cash value tax free to help finance college costs. However, the tax rules applying to life insurance loans depend upon the type of policy you have.

You also need to consider carefully the fees associated with annuity and insurance products and whether the cost of insurance benefits is worthwhile for your situation. Each situation must be evaluated independently.

Specialized Funding Vehicles

Two special arrangements are available that let you combine college funding goals with charitable intentions, resulting in special tax benefits:

(1) charitable trust
(2) charitable gift annuity.