COLLEGE FINANCING: WHICH STRATEGIES ARE BEST?

• Position: Brief Article

Families funding their children's college education face an array of confusing--and sometimes conflicting--choices and strategies: the education IRA, prepaid state tuition plans, tax credits, saving or not saving in your child's name, using a Roth IRA, etc. It is best to talk to a college funding expert. Meanwhile, the Institute of Certified Financial Planners, Denver, Colo., offers several financial scenarios to think about, each with suggested strategies:

Low income, few assets. Financial aid most likely will be a big part of your planning. Look for scholarships and grants, too, since you don't have to pay them back. Many are given on a financial-needs basis. You can save up to $1,500 a year in taxes by using the Hope Scholarship and Lifetime Learning credits when your child is in college.

Middle income, modest assets. Financial aid likely will be part of your picture, but try to save as much as you can. The majority of financial aid these days is in the form of loans. Saving in your offspring's name probably won't be worth it, since the tax benefits will be minimal and it will reduce his or her financial aid.

Consider an education IRA, in which you can invest up to $500 a year. Contributions are not tax-deductible, but earnings grow tax-free and are not taxed when used to pay for college. However, there are drawbacks. Assets in the account will be treated as your child's and may reduce your financial aid more than if you had saved money in your own name. Second, currently you can't use the Hope or Lifetime credits in a year you take money out of an education IRA. You will have to weigh which one is likely to be more valuable at the time. (Basically, can you earn more tax-free in the IRA than what you would receive in tax credits?)

High income, high assets. One avenue is to invest in growth assets, assuming you have at least five years until your child enters college. Growth assets will keep your tax bite down while the assets grow, and when you sell, the tax bite will be at low capital gains rates. A prepaid state tuition plan is an option, but if you are a confident investor...