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Helping Clients With A Key Goal: Planning And Paying For College

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Helping Clients With A Key Goal: Planning And Paying For College


Seattle, Wash.

“College education planning is always one of the top three planning objectives,” said Robert Cusick in an educational workshop here at the Society of Financial Service Professionals annual educational forum.

Cusick, who is president of Investment Insight, Ltd., Cortlandt Manor, N.Y., explained how important this goal is to his clients.

“Theres tremendous emotional valuethe desire for their children to succeed is very important to them,” he said. “The key is to start early and have a plan.”

At the beginning of the planning process, its important to set quantifiable goals with your clients, he said. These goals should be discussed with other family members, including the grandparents. And, since the time horizon is usually shorter than other financial goals, it is extremely important to monitor the plan, he said.

“Every two years we take a look at the college plan–what are the goals and where are we now?”

In the later years of the college plan, it is important to fine-tune the strategy, assessing potential colleges early, evaluating the students goals and grades, and researching all available sources for financial aid. (See chart.)

Summer jobs, work study programs, grants, loans and scholarships are some of the ways Cusick said students can help pay for their education.

One of the latest ways parents are planning for their children’s education is through the use of section 529 plans. Cusick noted that while most people think of these plans as savings plans, section 529 also includes prepaid tuition programs. “529 plans are a broad brush.”

Prepaid tuition programs vary by state, Cusick said, and are designed to grow at the rate of inflation of the in-state schools tuition. The programs cover tuition, fees, room and board, transportation, and related expenses, he said.

Cusick explained that distributions from these prepaid tuition programs are free from federal income tax when used for qualified educational expenses.

He warned, however, that the plan balances for these programs have a dollar for dollar reduction in the amount of student aid available, having an adverse effect on the amount of aid a student may qualify for. “If youre going to go with a prepaid tuition program, youd better fund it well,” he said.

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But when most people think of 529 plans, they usually think of qualified tuition savings programs, he said. And because of the 2001 tax law, public or private institutions can sponsor plansin addition to the states, he said.

“We can expect a lot of other folks to jump into the plan sponsor business,” Cusick predicted.

Under the qualified tuition savings program, contributions are made by a donor on behalf of a designated beneficiary, he said. Some of the other benefits of these 529 plans include donor control of the account, no income limitation for participation, and the asset’s being considered a parental asset when performing the student aid calculation.

Contributions to 529 plans qualify for the annual gift tax exclusion, he said, adding this gift can be averaged forward over a five-year period, resulting in a current available gift of $55,000 into the plan.

Since these rules allow such a large immediate contribution into the plan, Cusick said, “This is one of the programs that lets you save enough to make a difference.”

This increased gifting opportunity also lends itself to integration within your clients estate plan, he said. “This is a great tool to shift assets out of your estate right now,” he said.

Cusick noted that in the event of a death in the next five years, a pro rata portion of the gift would be included in the estate.

One of the other strategies that has seen some changes over the past year is the use of the Education IRA. The 2001 law expanded the Education IRA to include elementary and secondary school expenses, religious, public or private schools, he said.

“Eligible expenses have been expanded beyond tuition, room and board,” said Cusick, and now include computers and equipment, as well as Internet access, as long as it is used for educational purposes.

Contribution limits for education IRAs have been bumped up to $2000 per year, and the income limits have been expanded for joint filers, allowing participation at the $190,000 to $220,000 annual joint income level.

“They really tried to loosen the reins,” he said.

However, like many of the other benefits found in the new tax law, “the rules that cover this program are due to sunset in 2010,” he said.

Reproduced from National Underwriter Life & Health/Financial Services Edition, April 1, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.