Financial Planning for College : A tip from Used College Textbooks Net

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Financial Planning For College: Part 2    Part 1 Part 3

Strategies for Funding College Tuition
Growth Stocks and Growth Mutual Funds.Good investments in the stock market have the potential to provide better returns than insured, fixed-rate investments (such as savings accounts and CDs, which are generally FDIC insured) - if you have time to let the money ride the ups and downs of the market. This is a long-term approach to investing. And remember: What the stock market did in the past is no guarantee of how it will perform in the future.

The word to look for here is growth. When assessing the growth potential of a particular stock, consider looking for long-term appreciation rather than dividends. Growth stocks also allow you to postpone paying taxes on the capital appreciation realized until you withdraw funds.

Investing in just one or two stocks is always risky. If you'd like to participate in the growth potential of the stock market with less risk, consider a growth mutual fund. Money invested in such a fund is professionally managed and is usually diversified over many stocks, which helps reduce risk. Also, you can start investing in mutual funds with a relatively small amount of money.

U.S. Savings Bonds (Series EE).You need only go as far as your local bank to invest in Series EE U.S. Government Savings Bonds. The face values of these bonds range from $50 to $10,000, but you buy them at only half their face value. For example, when you buy a $50 bond, you pay $25 for it. The interest rate paid on these bonds varies, and EE bonds reach face value in a maximum of 17 years.

These bonds can offer substantial tax savings if they're used to pay qualified higher education expenses. If all requirements are met, no federal income tax is due on the interest. To get this important advantage, you'll need to follow certain guidelines. Among them: The savings bonds must be issued in 1990 or later and be purchased in one or both parents' name(s)-not the child's. Married taxpayers must file a joint return. The owner must be at least 24 years old before the bond's issue date. The bonds must be redeemed by the owner in the year they're used to pay for qualified higher educational expenses. Qualified higher educational expenses generally include tuition and fees and exclude room and board. Talk to your tax advisor and the person selling you the bond to be sure you've set up the purchase properly. Also, there are income restrictions on who can take advantage of this benefit. You'll need to call the Internal Revenue Service or your tax advisor to verify your eligibility.

Life Insurance.You shouldn't purchase life insurance unless you need protection. If you have a permanent life insurance policy paid with fixed annual premiums, you generally have the option of borrowing against its cash value. Of course, the amount of cash value available to borrow against varies, depending on the specific policy. The death benefit will be decreased by the amount of the outstanding loan. The interest rate charged on such loans is often reasonable, and in many cases you can pay back the loan on a flexible schedule. Talk to your insurance representative about the advantages of life insurance when planning your child's college education.

Prepaid Tuition Plans.Certain states, such as Alabama, Alaska, Colorodo, Florida, Massachusetts, Michigan, Ohio, Oklahoma, Pennsylvania, Tennessee, and West Virginia offer various types of prepaid tuition plans, generally for students attending state schools. Residents of these states can buy a contract or bonds at a fixed price, based on the rates of college tuition today. Payments can be made in lump sums or monthly installments. The state, in turn, invests the money to earn the difference between the amount you are paying and the projected cost of tuition at the time your child reaches college age. Those who sign up are fully protected, as the state assumes all the risk of the investments. Check with your state's commission on higher education to see if a prepaid tuition plan is available where you live.

Prepaid tuition plans are not for everyone. They mostly attract middle-income families who tend to be more conservative in their investments. Lower-income families using this option may jeopardize their chances for state aid and forfeit money needed for immediate essentials. If you're interested and a plan is offered in your state, you'll want to know if it covers only the cost of tuition, or room and board, too. Also, check to see if it applies to other than state schools. Finally, confirm that your original deposit will be returned if your child attends a private or out-of-state college, is not accepted at a state school or chooses not to attend college at all.

Savings Plan Trusts. Certain states such as Connecticut, Iowa, Kentucky, Louisiana, Massachusetts, New Hampshire, and New York offer special college savings accounts known as savings plan trusts. These accounts allow the contributor to save as little or as much as they like on behalf of a designated beneficiary's qualified education expenses. Contributions may be as little as $25. These accounts may guarantee a minimum rate of return and generally provide favorable tax treatment. The monies from the account may be used at any qualified institution of higher learning within the United States. If you move to another state, the money in the trust goes with you. Some savings plan trusts allow monies to be used for other family member's qualified education expenses. Check with your state's commission on higher education to see if a savings plan trust is available where you live.

Hope Scholarship Credit. Generally, for tax years after 1997, this credit will reimburse up to $1,500 per year of the cost of tuition and fees paid during the first two years of secondary education for joint filers with adjusted gross incomes of up to $80,000 and single filers up to $40,000. This credit phases out as your adjusted gross income increases and you are not eligible for this credit if your joint income is above $100,000 and single income is above $50,000.

Lifetime Learning Credit (LLC). Effective July 1, 1998, this credit will reimburse up to $1,000 of college tuition and fees per year through the year 2002 and $2,000 each year afterward. To qualify for the full credit, a taxpayer would need to spend $5,000 on qualifying expenses through 2002 and $10,000 each year after. Parents with more than one child may claim a LLC for one child and a HOPE credit for a different child in the same year. The two credits, however, may not be claimed in the same year for one child.

Educational IRAs. You are now able to set up IRAs for the purpose of paying college expenses. Contributions are allowed until your child reaches 18, and contributions may not exceed $500 per child per year. The $500 limit is phased out for joint filers with income above $150,000, and single filers above $95,000. Contributions are made with after tax dollars. There is no tax deduction. This type of IRA allows you to make withdrawals for the purpose of paying college expenses. Neither ordinary income tax nor the 10% penalty for premature withdrawals apply if the distribution is used for tuition, fees, books, and room and board, and the taxpayer has not claimed either a HOPE or LLC credit in the same year as the distribution.

CDs and Bank AccountsBank Certificates of Deposit (CDs) and bank savings accounts are two other places to put college savings. Although CDs and bank savings accounts are generally FDIC insured, they generally offer a lower return potential than other investment vehicles and are most appropriate for those with short-term goals.More...

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