Edward Jones Diversity Series

"Are You Prepared for Your Child's Education?"

October 2003 - If you are like most parents, you have big dreams for your children. Even before they could talk, you may have had hopes that they would one day announce they wanted become doctors or lawyers -- two favorite professions of parents for their children. Or maybe your wish for them is to grow up and follow the career of their choice.

Whatever your wishes are for your children's futures, they'll need a college education for a better chance of success in an increasingly competitive job market, and one that commonly views a college degree as the new high school diploma. In other words, a college degree is now a minimum requirement for many entry-level jobs, and according to the College Board, the organization behind the SAT, college graduates generally make 75 percent more than those with high school diplomas.

While you may have high ambitions for your children's future, have you saved enough money to help them achieve their educational goals?

The Rising Costs of Tuition

According to the College Board, the current average cost per year for students attending public colleges or universities in-state is $12,841 and $19,188 for out-of-state students. Hovering at $27,677, the average costs per year are even pricier for private colleges and universities. Multiply these average yearly costs by four and tuition ranges from $50,000 to more than $110,000. With costs seeming to rise every year, it is not difficult to understand why many parents are worried about their ability to pay tuition and fees.

"I'm very worried," said Michelle Brown, a mother of four and current graduate student who lives in Black Jack, Missouri, a suburb of St. Louis. "Colleges cost so much, and when the time comes, I possibly could have three kids attending college at the same time. But my husband and I will work second jobs to make sure each of our kids goes to college."

You Can Either Hope or You Can Prepare

As many parents worry about covering the cost of tuition, others pin their hopes on just that: hope. "We're hoping our children will qualify for scholarships," some parents, often African American and Latino parents, will say. But both academic and athletic scholarships are highly competitive. They generally help offset college expenses rather than cover them entirely, and as Pierre Johnson, an Edward Jones investment representative based in Austin, Texas, said, "You can either hope or you can prepare."

Edward Jones has three types of financial products to help prepare parents to send their children to college.

"When a client comes in, we can consider a 529 plan, a Coverdell Education Savings Account or a custodial account," said Johnson.

What's Your Plan?

A 529 Plan allows individuals to save and invest for future college and graduate school expenses of a child or other beneficiary. Plan contributions are considered gifts and are limited to $11,000 per year or $55,000 in one year and can be distributed over five years. If the five-year special gifting provision is used, no other gifts can be made on behalf of the minor for five years. Yet, if the owner of the account should die before the end of the fifth year, the prorated amounts of the contributions reverts back to his or her estate.

In addition to allowing sizable contributions, another 529 Plan benefit includes distributions without income tax or penalty for tuition and other education expenses such as books and supplies. However, withdrawals used for expenses other than qualified education expenses may be subject to federal, state and penalty tax.

A 529 also offers beneficiary flexibility to account owners. If the specified beneficiary decides not use the funds, the account owner or she may transfer all or a portion of the unused balance from one family member to another to be used for educational expenses incurred by the new beneficiary.

The Coverdell Education Savings Account is used for the purpose of paying "qualified education expenses" for an eligible student. The annual contribution limit for the Coverdell is $2,000. However, earnings accumulate tax-deferred and qualified distributions are tax- and penalty-free. Like the 529 Plan, if a withdrawal is used for expenses other than education, taxes and penalties may apply.

Custodial accounts are set up under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). This account allows individuals to make irrevocable gifts to minors in the form of cash or securities. Saving with a custodial account can provide certain tax advantages. In addition, the custodian retains control over the account until the child reaches legal age. However, at legal age the child will gain control of the account and may use the funds at his or her discretion. Any withdrawals made before the child reaches legal age must be used for the benefit of the child.

Founded in 1871, Edward Jones was one of the first financial services firms to recognize that a sound financial future should be available to everyone. It achieves this philosophy through thousands of highly trained investment representatives like Pierre Johnson who offer one-on-one service throughout the country to help families achieve their financial goals.

For more information about Edward Jones, its products and for assistance with finding an investment representative in your area, please visit www.edwardjones.com.