SC Lawyer, Jan. 2004, #3. A penny saved ... a degree earned.

AuthorBy Gail D. Moore

South Carolina Lawyer


SC Lawyer, Jan. 2004, #3.

A penny saved ... a degree earned

South Carolina LawyerJanuary 2004 A penny saved ... a degree earnedBy Gail D. MooreMy children recently celebrated their second and fourth birthdays. As I cleaned birthday cake out of my carpet, I thought about what it will cost to send my children to college. According to my research, the total projected cost for my four-year old to attend four years of college in 2017 is $74,000; it increases to $81,000 by the time my two-year-old attends college in 2019. These figures captured my attention and confirmed that although we are saving for college, we are not doing enough.

There is good news for families preparing for college. Congress has enabled many tax-advantaged college savings programs and credits for qualified educational expenses. There are many choices available for saving for college, from the simple savings bonds, to uniform gift to minors accounts, Coverdell Educational Savings Accounts and the qualified tuition programs used for college savings, commonly referred to as "Section 529 Plans." Each of these choices has distinct advantages and disadvantages, as well as differing tax consequences. Each also affects a family's ability to receive collegiate financial aid in a different way. The pros and cons of each savings vehicle are discussed below.

Savings bonds

Series EE or I savings bonds are the simplest way to save for a child's future educational expenses. Savings bonds are easy to purchase and enjoy great flexibility in redemption. In fact, investors can purchase and sell savings bonds via the Internet. Investors can redeem savings bonds as quickly as six months after purchase. Quick redemption is disfavored, however, as a three-month earnings penalty applies to any redemption within five years of the bond's issuance. The maximum investment available in savings bonds is $30,000 per year for Series I bonds and $15,000 per year for Series EE bonds.

Savings bonds' tax features make them attractive for college funding. First, individuals may defer the recognition of interest income until the bonds are redeemed. Additionally, if the proceeds from the redemption are used to pay higher education tuition and fees, subject of family income thresholds, the income may be excluded from recognition in its entirety. To avoid income recognition, the bonds must be issued after December 31, 1989, they must be purchased by an individual who is 24 years old or older and the bond proceeds must be used to pay higher education expenses of the taxpayer, the taxpayer's spouse or their dependent children. The exemption amount is limited to the amount used to pay higher education expenses in the year of redemption.

For financial aid purposes, Series EE or I savings bonds are treated as the parent's assets if the educational expenses are for a dependent child. They are treated as the student's assets if the educational expenses are for a person not claimed as a dependent on another individual's tax return.

Uniform gift to minors accounts

Uniform gift to minors accounts formed under the Uniform Gift to Minors Act (UGMA) are very popular college savings devices. They are simple and inexpensive to create. These accounts enjoy unlimited contributions, but college planners should be aware that any contribution over $11,000 annually is considered a taxable gift. UGMA account proceeds may be used to fund...

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