- The Washington Times - Sunday, April 14, 2002

The time to think about college costs is not when Junior is taking the Scholastic Assessment Tests. It is not even when Junior is playing T-ball or learning to ride a two-wheeled bicycle.

The time to start saving is when Junior is in diapers. Even better begin when Junior is just a thought.

"Most people who think about college costs already have children," says Ric Edelman, a McLean financial planner, in his book "The Truth About Money," "but if you have got at most 18 years to plan for college, think again. If you might have children one day, start saving now. That way you will give yourself 20 or 25 years to save instead of 18, 15, 10 or three. The more time you have, the easier it is to achieve your goal."

The manner in which one saves can make a big difference over time, Mr. Edelman says.

Section 529 college savings plans are gaining popularity because of tax-law changes that went into effect Jan. 1, he says. Under those plans, parents can contribute up to $250,000 (Virginia) or $175,000 (Maryland). The contributions are invested in a mix of stocks and bonds that are customized to meet a family's level of risk and time left until college. The money grows, tax-deferred, and will be tax-free if used for qualified higher-education expenses.

The money may be used for college tuition, fees, room, board, books and equipment at any accredited school. Other benefits of the program include transferability if the child decides not to attend college, the funds can be transferred to another child. Also, there may be a state tax deduction for money invested, depending on the state in which one lives.

"The changes are wonderful," Mr. Edelman says. "Nowhere else can you invest practically unlimited money and have the profits grow tax-free."

However, the 529s, like any investment, have a downside. If the money is withdrawn for non-qualifying expenses, it is subject to taxes plus a 10 percent penalty, and the plan can lose money, depending on the fluctuations of the stock market.

Also, the money invested may be counted as an asset of the owner of the plan (usually the parent) when a student is applying for financial aid, says Kalman A. Chany, a New York financial aid consultant and author of the book "Paying for College Without Going Broke." However, current financial aid formulas count just 5 percent of parental assets when calculating a family's need amount.

"The dollar value could reduce the aid available," he says. "The benefit of the 529s really depends on the age of the child. If he is ready to go to college soon, you are not going to get that tax break."

The Section 529 plans are different from state prepaid tuition programs. Those programs, which are available in 33 states, including Virginia and Maryland, essentially let students lock in tuition at state schools at today's tuition rates.

"These plans have been wildly oversold by the states," Mr. Edelman says. "Many parents buy into them without really understanding the fine print."

The fine print families should understand:

• The plan covers tuition and fees only, but room and board can be about half of the cost of attending college.

• The state does not have to guarantee that your child will be accepted at one of its universities.

• If a child does not attend school in the state, the return on the investment usually is less than 4 percent.

• If you move out of the state where you are investing, you will have to make up the difference to pay out-of-state tuition.

• Prepaid tuition distributions are treated like scholarships they reduce financial need on a dollar-for-dollar basis.

• Penalties include cancellation fees and loss of interest accrued for pulling out of the program.

"Prepaid tuition works like a charm if your kid is going to an in-state college and if you have saved for room and board," Mr. Edelman says. "If not, it is a disaster."

Another savings options is the Coverdell Education Savings Account (ESA), which formerly was known as an Education IRA.

Families can invest up to $2,000 a year in this plan. The money grows tax-deferred, and withdrawals will be tax-free if used for qualified education expenses. The money can be used for college as well as elementary and secondary education expenses.

This program has income limits ($110,000 for single filers; $220,000 for joint filers). ESAs also are counted as the student's asset, which may reduce federal financial aid eligibility under current financial aid formulas.

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