Back to school: following the PATH for higher education funding.

• Author: Foss, Mary Kay
• Position: Financial planning

Higher education costs are escalating and families are trying their best to keep up with them. This article will discuss various strategies to help fund this important expenditure. The Protecting Americans against Tax Hikes (PATH) legislation extended and made permanent some of the education tax strategies, which also are available for adults who want to increase their educational credentials.

Qualified Tuition Plans (Sec. 529)

These plans have become a popular method for putting away college funds. The basic idea is that funds are contributed to a prepaid plan or a savings plan that will be available when the child is ready for college. Initially, all of the plans were sponsored by a state, but colleges and universities can now sponsor their own plans.

Each plan has a maximum funding amount that can be met by contributions. For example, the California ScholarShare College Savings Plan has a maximum of $371,000 per beneficiary (the potential college student). In Alaska, $400,000 can be invested and Arizona allows $419,000 per beneficiary, but the Georgia plan will only accept $235,000. While the designated beneficiary is the individual to whom funds are being accumulated for, there is some flexibility if the owner wants to transfer funds to another beneficiary with higher college expenses.

Parents, grandparents or the child can make contributions. Lump sums are typically contributed, but payroll deductions and automatic investment plans are also available in many states. The donor stays in control of the account. Funds can be withdrawn for any purpose, but if they're not used for higher education, the earnings portion will incur a 10 percent penalty tax and be subject to income tax. The beneficiary can be changed with no tax consequences if the new beneficiary is a member of the family.

The PATH change is that a computer will qualify as a higher education expense for 529 Plan purposes.

The California ScholarShare Plan is managed by TIAA-CREF and other investment advisers manage the plans of other states. The beneficiary need not attend college in the state sponsoring the plan as a general rule, though some states have more restrictive requirements.

You can compare funds, performance and fees online at www.savingforcollege.com

Contributions to a 529 Plan are taxable gifts and generally qualify for the annual exclusion for gift tax purposes. In fact, five years' worth of exclusion can be used for one gift. For example, a couple can contribute...