529 Plans and Other College Savings Options

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If you have kids, you want a college education for them. But -

• Do you know how much college costs?
• Do you know how much you need to save?
• Do you know the many different tax-advantaged ways to save for college?

We've written this guide to answer these questions and give you the information you need to save and invest wisely for college. You can make a college education an affordable choice for you or your child.

College costs are rising - Are you keeping pace?

We all know that college costs are rising. For 2001-02, The College Board^® reported that the average cost for tuition and fees at private four-year colleges was $17,100, up 5.5% over the previous year. Although the $3,800 average cost of tuition and fees at a four-year public college are a lot less, these costs are up 7.7% from the previous year. In the past 10 years, the cost of tuition and fees at four-year private colleges have risen 33% and at public colleges 40%.¹

If college costs were to increase at just 5% per year, in 10 years the average cost of tuition and fees at a four-year private college would be $27,900, and the average cost at a four-year public college would be $6,100. And this is just tuition and fees! For 2001-2002, The College Board^® reported that room and board charges averaged $6,500 at four-year private colleges and $5,300 at four-year public colleges.

Source: Trends in College Pricing 2001, The College Board^®. Assumes a 5% increase in college costs each year and a child entering college at age 18.

But don't despair. While college costs are rising, many colleges still remain affordable. The College Board^® reported that more than 40% of students attending a four-year college pay less than $4,000 in tuition, and almost 70% of students pay less than $8,000.

So college is still within reach for most families, but especially for those that start saving early for college.

¹ Source: Trends in Student Aid 2001, The College Board^®.

Saving for College with Compounding

Don't be daunted by the amount you may have to save. Small amounts of money, if invested early, can become sizable investments through the remarkable power of compounding. For example, if you save $200 a month at an 8% annual rate of return for your newborn child, you will have over $96,000 for college when she turns 18.

Remember to factor tuition, room, board, and books into your calculation. If you know where you want your child to go to college, but don't know the current costs, you can use the National Center for Education Statistics' school locator to research the costs. If you are unsure where you want your child to go to college, The College Board^® says a year at a private four-year college now averages $23,600 and at a public four-year college averages $9,000.

Financial Aid and Savings

As part of saving for college, you need to know whether your child will be eligible for financial aid, which reduces what you may need to save for college.

You also should be aware, however, that saving for college might impact financial aid. In fact, any investments or savings can affect federal financial aid eligibility (This is determined by completing the FAFSA) The impact on financial aid varies depending on whether the savings belong to the parent or the child. Now, savings in a parent's name can reduce federal financial aid eligibility by at most 5.6%. But assets saved in a child's name can reduce aid eligibility by 35%. Prepaid tuition plans like those we are about to discuss may have even a greater impact on federal financial aid. Every dollar saved in a prepaid tuition plan can reduce a family's federal financial aid need by a dollar. So, if you save $10,000 in a prepaid tuition plan, you will be considered as needing $10,000 less in financial aid. States and private colleges may have their own rules for financial aid, and some states give more favorable treatment to pre-paid tuition plans and other college savings options.

Financial aid is a complex and confusing area. But remember that financial aid today is not a gift - about 60% of aid for 2001-02 consisted of loans.2 While savings may decrease financial aid, you and your child will likely be in a much better financial situation on graduation day if you start saving now for college. The more you save now, the less you will need to borrow later.

² Source: Trends in Student Aid 2001, The College Board^®.

College Saving While Saving Taxes

Once you determine how much you need to save or can afford to save, you need to decide what types of college saving vehicles you want to use. In addition to mutual funds, regular brokerage accounts, and bank savings accounts, there are now a number of tax-advantaged alternatives available to help you save for college. Get the facts about each of the options, and decide which type might be right for you:

• 529 plans
  • Prepaid tuition plans
  • College savings plans
• Coverdell Education Savings Accounts
• Custodial Accounts
• Savings Bonds

To help you understand the differences among these college savings options, use our Comparison of College Savings Options chart. We also offer you Tips for Choosing College Savings Options and links to other resources for more information.

Remember: the tax rules that apply to college savings options are complicated. Before investing, you may want to check with your tax adviser about the tax consequences of investing in any of these options.

529 Plans

Named after the section of the federal tax code that governs them, 529 plans are tax-advantaged programs that help families save for college. Selecting a plan requires homework. Almost every state offers at least one 529 plan, and the tax advantages, investment options, restrictions, and fees can vary a great deal. Beginning in 2002, even more choices may become available, as many colleges will be able to offer 529 plans too.

Before buying a 529 plan, you should find out about the particular plan you are considering. Request an offering circular or official statement from the plan sponsor or your financial professional. Most 529 plans provide this document on their Web sites. You can find links to 529 plan Web sites on The National Association of State Treasurers' College Savings Plans Network Web site or you can call them toll-free at 877-277-6496 for information on the 529 plans you are interested in.

Two Types of 529 Plans

There are two types of 529 plans - prepaid tuition plans and college savings plans. Every state offers at least one of these types of plans or is developing one. Some states offer both, and many of these plans are open to non-residents.

Prepaid Tuition Plans

Prepaid tuition plans allow parents, grandparents, and others to lock in today's tuition rates at any of a state's eligible public colleges or universities so that they don't have to worry about future tuition increases.

• Contribution Limits You pay for amounts of tuition (years, credits, or units) in one lump sum or through installment payments. There are a number of options. Some states offer contracts for a two-year community college or a four-year undergraduate program, or a combination of the two, and can cover one to five years of tuition. Some states even allow the contract to be applied to graduate school tuition.
• Covered Educational Expenses With only a few exceptions, however, most prepaid college plans do not cover other expenses, such a room and board. So you may want to consider other college savings options to cover these costs.
• Residency Requirements and Other Limitations Unlike college savings plans, most prepaid tuition plans require either you or your child to be a resident of the state offering the plan when you apply. Some limit enrollment to a certain period each year. Many prepaid tuition plans also have age or grade limits for beneficiaries (i.e., future college students).
• Investment Options Prepaid tuition plans have no investment options. Under prepaid plans, the price of the contract is determined prior to purchase and usually depends on the type of contract, the current grade of the beneficiary, the current and projected cost of tuition, and the projected rate of return. These programs then pool the money and make long-range investments so that the earnings meet or exceed state college tuition increases. When a child is ready to go to college, the plan transfers funds to cover the tuition directly to the institution.
• Portability If your child chooses not to attend an in-state public college, all is not lost. All prepaid plans allow you to use plan money to pay tuition at most private and out-of-state public schools. Many prepaid tuition plans will pay out an amount equal to the weighted average tuition and mandatory fees at your state's public institutions, not to exceed the actual tuition and fees you incur. All prepaid plans also let you transfer the plan to a child's brother or sister (although age restrictions may prevent transfers to an older sibling). Unfortunately, if your child chooses not to go to college and a sibling doesn't use the plan, or you need to cancel the prepaid plan, most states will only give you back what you originally contributed with a reduction or elimination of any interest earned. Some plans also charge a cancellation fee.

College Savings Plans

With college savings plans, students of all ages can save for all college costs, including tuition, fees, room, board, textbooks, and computers.

Not Just for Children. If you are considering going back to college or graduate school, you can open a college savings plan for yourself. You will save on taxes and if you end up not going to school, you can always transfer the money, tax-free, to another 529 plan for your children or spouse.

• Not Limited to In-State Public Colleges or State Residents Withdrawals from college savings plans can be used at most colleges and universities throughout the country, including graduate schools. Some foreign education institutions also may be eligible. Many states now offer at least one college savings plan that has no residency restrictions. You can live in Ohio, contribute to a plan in Maine, and send your child to college in California. However, if your state offers state tax advantages to residents who participate in the local plan, you'll miss out if you opt for another state's 529 plan.
• Covered Education Expenses College savings plans typically cover all "qualified education expenses" at eligible colleges, universities, and other post-secondary institutions including:
  • Tuition
  • Fees
  • Books and supplies
  • Equipment
  • Room and board
• Contribution Limits When you invest in a college savings plan, you pay money into an investment account on behalf of a designated beneficiary. Contributions can vary and are only limited by the maximum and minimum contributions limits set by most plans. Although the maximum amount of contributions differs from state to state, in the majority of states offering college savings plans, the maximum amount that you can contribute for one beneficiary exceeds $200,000.

To further increase the amount of contributions you can make, you can open a second college savings plan in another state. Currently, the IRS only requires that contributions for one child cannot be more than the amount necessary for the qualified higher education expenses of that child. So if you want your child to go to an expensive college and graduate school, one option you have is to open more than one college savings plan.

Most states also offer very flexible minimum contribution limits. Many require a $250 initial contribution with subsequent contributions of as little as $50. These minimum contribution amounts can be reduced even further in many states if you make contributions through payroll deductions or automatic transfers from a bank account.

• Investment Options Typically, each plan gives you a number of investment options that allow you to invest in various portfolios of mutual funds. Some college savings plans offer age-based portfolios of mutual funds. When the child is younger, the portfolio typically invests mostly in stock funds, which carry a higher risk, but higher return potential. As your child grows older, the asset allocation becomes increasingly conservative as it gradually shifts to bond funds and other fixed-income funds.
• Many states also offer non-age-based investment options, allowing you to select portfolios with conservative, moderate, and aggressive asset allocations. Some states also offer investments options that allow you to invest in certificates of deposits whose interest rates are linked to an index that measures the average cost of college tuition.
• Until recently, once you selected an investment option within a college savings plan, you could not change that option. Only new contributions could be invested in different investment options. Now, however, the IRS allows you to change your investment options once every calendar year in a college savings plan. Not all plans have made the changes necessary to permit you to switch investment options, so check each college savings plan you are considering to see if it allows you to change investment options every year.
• Investment Risk Investing in college savings plans does come with some risk. Unlike prepaid tuition plans, they don't lock in tuition prices. Nor does the state back or guarantee the investments. There also is the risk with most college savings plan investment options that you may lose money, or it may not grow enough to pay for college. For example, if you choose a plan option that invests in stock mutual funds, chances are that your invested funds annual performance will mirror the trends of the stock market. Thus, you may lose money during a declining market.
• Fees, Charges, and Expenses All 529 plans have various fees and expenses. Not only do these charges vary among 529 plans, but also they can vary within a single 529 plan. With college savings plans, there are an even wider variety of fees and expenses. Like mutual funds, some college savings plans have different classes. Often referred to as Class A, B, or C shares, units or fee structures, each class has different fees and expenses. You can look at the offering document to see if a particular college savings plan offers more than one class.

It is very important to take fees and expenses into account when selecting a college savings plan. Slightly larger fees and expenses can make a big difference in the value of your investment over time. Let's say you invest $10,000 in a college savings plan with a return of 10% before expenses. With a plan that had annual operating expenses of 10.97% (Yes, one plan has expenses that can be this high!), after 18 years, you would end up with only $6,866. That's over $3,000 less than you started with. If the college savings plan had expenses of 0.85%, you would end up with $47,680 - an 85% difference!

Here's a list of some of the most common fees, charges, and expenses found in college savings plans:

• Enrollment Fee. Several college savings plans charge a minimal enrollment fee. Currently, the highest enrollment fee is $90. Most enrollment fees are under $50.
• Annual Maintenance Fee. Most college savings plans charge annual maintenance fees. These fees usually range from $10 to $50. Many plans reduce or eliminate this fee for residents, if you make automatic contributions, or if you maintain a certain balance, typically $25,000.
• Sales Charge (Load). Several college savings plans charge a sales charge when you buy certain investment options within a plan or purchase a plan through a broker or investment adviser instead of directly from the state. Generally, you can determine the sales load by looking at the fees and expenses section of the offering circular or prospectus. Not every plan has a sales load. The load also may differ between classes in a single plan.
• Deferred Sales Charge. A deferred sales charge or contingent deferred sales charge (CDSC) is a charge you pay when you withdraw money from an investment option or college savings plan. It is sometimes referred to as the back-end load. The charge may start out at 2.5% for the first year, and get smaller each year after that until it reaches zero. Generally, you can determine the deferred sales charge by looking at the fees and expenses section of the offering circular or prospectus. Not every college savings plan has a deferred sales charge. In some plans, a deferred sales charge also may be levied on certain classes of the plan.
• Administration/Management Fee (Expense Ratio). This is the total annual college savings plan operating expenses expressed as a percentage of the plan's assets. For example, an expense ratio of 1% represents an annual charge to the plan's assets - including your proportional interest in those assets - of 1% per year.
• Underlying Fund Expenses. Because college savings plan portfolios typically invest in a number of mutual funds, they bear part of the fees and expenses of these underlying funds. This expense is expressed as a percentage of a mutual fund's assets. Because college savings plan investment portfolios sometimes invest in a number of mutual funds, the offering circular or prospectus may contain fund expenses percentages for each of these funds.

Comparison of 529 Plans

Common Features of Prepaid Tuition and College Savings Plans

Federal Tax Advantages One of the biggest advantages of 529 plans over other college savings options are the tax advantages they offer. Earnings grow tax-free, and, beginning in 2002, withdrawals also are tax-free for qualified education expenses.3 Before 2001, withdrawals were taxed at the student rate.

Caution! The law exempting qualified withdrawals from federal income tax expires on December 31, 2010. Unless Congress and the President take action to extend the provisions of this law, withdrawals from 529 plans will not be tax-free beginning in 2011. Keep this mind if you have younger children who will be in college after 2010.

Although the IRS typically allows you to give no more than $11,000 a year to another person without a federal gift tax, you can contribute up to $55,000 to a 529 plan in one year. A special tax law allows you to aggregate five years of the allowable $11,000 annual gift-tax exclusion to jump start a 529 plan. While you will be precluded from making any further gifts for five years, compounding will make your earnings grow faster than if you invested $11,000 in each of the five years.

Also, anyone can contribute to a 529 plan. Unlike education savings accounts (ESA's) and saving bonds, which are discussed later, there are no income limitations. For most wealthy families, 529 plans are one of the few available tax-advantaged college savings options.

State Tax Advantages State tax treatment of 529 plans varies from state to state. In over 20 states, contributions are tax deductible if you're a resident of the state sponsoring the 529 plan. For example, in Missouri, up to $8,000 in contributions to the state's 529 plan can be deducted from Missouri state taxable income per taxpayer per year. Many states also don't tax earnings or qualified withdrawals from 529 plans. To get this tax exemption, you may have to live in that state and choose its 529 plan. These tax benefits may net you more investing in your state plan than if you invest in another state's plan that earns more.

Control Unlike Custodial Accounts and ESA's, 529 plans allow the account owner to maintain control over the assets in a 529 plan for the life of the account. You also can change beneficiaries to another "family member" of the original beneficiary. Thus, if your child gets a scholarship or decides not to go to college, you can name another beneficiary, even yourself. Some 529 plans, especially prepaid tuition plans, may limit or restrict your ability to change beneficiaries, so check the plan offering document.

Transfers The assets of one 529 plan can be transferred tax-free to another 529 plan of another beneficiary, as long as the new beneficiary is a "family member" of the beneficiary of the 529 plan from which the transfer was made. "Family members" include, among others, the beneficiary's spouse, son, daughter, grandchild, niece, and nephew. As of 2002, first cousins also qualify.

Starting in 2002, the assets of one 529 plan also can be transferred tax-free to another 529 plan for the same beneficiary. However, only one transfer of this type is allowed within any 12-month period. There also may be state tax implications when you transfer from one 529 plan to another. You may want to consult with your tax advisor before you make a transfer.

Withdrawals for Non-College Related Expenses If your child decides not to go to college or you over-fund a 529 plan, you may pay a penalty in addition to any taxes you owe on any earnings. If you withdraw money from a 529 plan that is not used for qualified education expenses, you are generally required to pay income tax and an additional 10% penalty on earnings.

There are a number of exceptions to this penalty. The penalty may be waived if your child gets a scholarship or is disabled. You also can avoid the taxes and penalties by transferring the 529 plan to another beneficiary that will use the funds for qualified education expenses. Furthermore, you can use our College Savings Calculator to estimate the amount you need to save so that you don't over-fund a 529 plan.

³ Until 2004, withdrawals from school-sponsored 529 plans are taxable.

Coverdell Education Savings Accounts

Those who want more investment choices may want to consider Coverdell Education Saving Accounts (ESA's).

No Investment Restrictions Formerly known as Education IRAs, ESA's are another tax-advantaged way to pay for college. Unlike 529 plans, your investment options are virtually limitless. Except for investing in life insurance contracts, you can buy and sell what you want whenever you want. Also, you can set them up at almost any brokerage firm, mutual-fund company, or other financial institution.

Federal Tax Advantages Earnings in ESA's are tax-deferred, and withdrawals that are used for qualified education expenses are tax-free.

Education Expenses Covered One advantage that ESA's have over other tax-advantaged saving options is that you can make tax-free withdrawals to pay for private elementary and high school expenses, as well as post-secondary school expenses. So if a private school is in the future, one option you might want to consider is saving for that expense in an ESA and using a 529 plan for college.

Contribution Limits ESA's have two annual contribution limits for individuals:

1. You can give up to $2,000 to any one beneficiary assuming you meet the ESA income limits discussed below.
2. The total of all contributions to all ESA's set up for one beneficiary cannot exceed $2,000. If other family members set up ESA's for your child, you need to check with them to make sure this contribution limit is not exceeded.

If you exceed these contribution limits, there is a 6% excise tax on excess contributions.

Invest $2,000 a year at an annual yield of 6% from the time your child is born, and you will have a little over $61,000 in college savings when your child turns 18. Can't save that much or think you can get a higher return on your investment? Use our savings calculator to estimate your savings.

Income Restrictions Beginning in 2002, more families became eligible to contribute to an ESA because income limits were raised for married couples filing jointly. A couple filing a joint return can now contribute the full $2,000 if their modified adjusted gross income is less than $190,000 a year. The ability to contribute is phased out for couples filing jointly with modified adjusted gross incomes of between $190,000 and $220,000. Contributions are not allowed for couples filing jointly whose modified adjusted gross income is above $220,000.

Single taxpayers will be able to contribute $2,000 if their modified adjusted gross income is less than $95,000. Single taxpayers' ability to contribute is phased out if their modified adjusted gross income is between $95,000 and $110,000. No contributions are allowed if their modified adjusted gross income is above $110,000.

Organizations, such as corporations, can also contribute to ESA's and are not subject to any income limits.

Figuring Your ESA Contribution Limit. If your income is between $190,000 and $220,000 (joint filers) or $95,000 and $110,000 (single filers), you can figure your ESA contribution limit for 2002 by using the following equations:

Married Joint Filers
$2,000 - (Modified Adjusted Gross Income - $190,000 * $2,000) = Contribution Limit $30,000

Single Filers
$2,000 - (Modified Adjusted Gross Income - $95,000 * $2,000) = Contribution Limit $15,000

Fees, Charges, and Expenses Fees, charges, and expenses will vary depending on the investments you choose and the institution where you open an ESA. Remember, however, that because of the fairly low contribution limits, even small annual fees or expenses could make a big difference in the value of your investment over time.

Custodial Accounts

Custodial accounts - Uniform Gift to Minors Act (UGMA) accounts or Uniform Transfer to Minors Act (UTMA) accounts - are another tax-advantaged way to save for college. A parent, grandparent, or other adult is custodian for the account and makes all the investment decisions until the child for whom the account was opened reaches the age of majority. UGMA accounts are limited to money and securities. UTMA accounts can hold other types of property. You can set up these accounts at almost any brokerage firm, mutual-fund company, or other financial institution.

Advantages For children younger than 14, the first $750 in earnings in a custodial account is tax-free. The next $750 in earnings is taxed at the child's federal tax rate in 2001. Any earnings over $1500 are taxed at the custodian's federal tax rate. For children over 14, the first $750 in earnings is still tax-free, and all earnings after that are taxed at the child's tax rate. To learn more about the tax rules for children, you should read IRS Publication 929: Tax Rules for Children and Dependents.

As with ESA's, your investing options are virtually limitless. Nor are there any contribution or income limitations. In addition, withdrawals can be used for any purpose, not just qualified education expenses, without penalty.

Disadvantages When your child reaches the age of majority - 18 to 25 depending on the state you live in - he or she takes over control of the account and can use the money in the account for anything. Because you lose control over how the money may be spent, some parents and grandparents may not like this option. Another potential disadvantage is that because the account is considered the child's asset, you can't switch beneficiaries. So if your child decides not go to college or gets a scholarship, you can't switch the money to a brother, sister, or other family member.

Tax-Free Transfer to a 529 Plan. You now can transfer funds from a custodial account to a 529 plan if the plan accepts such transfer. However, you must liquidate any investments you have made in a custodial account because you can only transfer cash and pay taxes, if any, on any gains. Another problem with transferring custodial account funds is that the money is the child's asset, not yours, so you cannot transfer the 529 plan to another beneficiary. There also may be other restrictions and limitations.

Series EE & I Savings Bonds

U.S. Series EE savings bonds issued after 1989 or Series I saving bonds are another tax-advantaged way to save for college.

Advantages Backed by the full faith and credit of the United States government, the interest from these bonds is tax free if used for qualified higher education expenses. Interest on Series EE and I savings bonds also is usually exempt from state and local taxes.

Disadvantages The full interest exclusion is only available to married couples filing jointly with modified adjusted gross income of less than $83,650 and for single filers with modified adjusted gross income of less than $55,750 in 2001. The interest exclusion is phased out if your modified adjusted gross income is between $83,650 and $113,650 for joint filers and between $55,750 and $70,750 for single taxpayers. Regardless of your income, married couples filing separately cannot take advantage of this savings bond program. You can learn more about the Educational Savings Bond Program in IRS Publication 970: Tax Credits for Higher Education.

The rules for using savings bonds for education can be complicated. To learn more about using savings bonds for educational expenses, you should read the Bureau of Public Debt's frequently asked questions on education and savings bonds. The Bureau of Public Debt's Web site also provides information on the latest rates for Series E and Series I savings bonds and how to buy saving bonds directly from the federal government.

College Tax Credits

The Hope Credit and Lifetime Learning Credit offer another way to reduce your taxes while paying for college. Available for only the first two years of college, the Hope Credit equals 100% of the first $1,000 paid for college tuition and fees and 50% of the second $1,000, for a maximum credit of $1,500 per student. To qualify for the Hope Credit, your child must be pursuing a degree, going to school at least half time, and not have a felony drug conviction.

With the Lifetime Learning Credit, you can claim up to 20% of the first $10,000 paid for college tuition and fees, for a maximum credit of $2,000 per tax return.

Unlike the Hope Credit, there is no limit on the number of years you can claim the Lifetime Learning Credit. It may be used for undergraduate and graduate courses and even for tuition and fees when your child is attending school less than half time. But, you can only claim the credit once per tax return no matter how many children you have enrolled in college at the same time.

The full credits are available to you if your modified adjusted gross income is less than $40,000 if you are a single taxpayer and $80,000 if you are married filing jointly. The credits phase out if your modified adjusted gross income is between $40,000 and $50,000 if you're a single taxpayer and between $80,000 and $100,000 if you are married filing jointly. You can't get either of these credits if your modified adjusted gross income is above $50,000 if you are a single taxpayer, above $100,000 if you are married filing jointly or you are married filing separately.

If you qualify for a Hope Credit or Lifetime Learning Credit, you can still claim the credit even if you make a withdrawal from a 529 plan or ESA. You just can't use the credits to pay expenses paid with 529 or ESA money. Prior to 2002, you could not claim these credits if you made a withdrawal from a 529 or ESA.

More information on the availability of these credits can be found in IRS Publication 970: Tax Credits for Higher Education.

Tips for Choosing College Savings Options

• Understand the Tax Benefits

  A number of college savings options offer tax-advantaged ways to save. Taking advantage of these savings options may greatly affect how much you can accumulate for your child's college education. In addition to the federal tax benefits of many college savings options, there may also be state tax benefits. Savings bonds are usually exempt from state and local taxes. Many states allow you to deduct some or all of your contributions to a 529 plan if you're a resident of the state sponsoring the plan. In addition, states may offer other tax advantages for 529 plans. Because of these state tax benefits, you might want to check out your own state's 529 plan before considering out-of-state plans.

  Everyone's tax situation is different and state and federal tax law can be complex. You may want to consult with your tax advisor about which college savings options are best for you.

• Examine Fees and Expenses

  All of the college savings options discussed above involve various fees and expenses. A college saving option with higher costs must perform better than a low-cost option to generate the same returns for you. Even small differences in fees and expenses can translate into a large difference over time.

  While we explain the various expenses involved with many 529 plans, that does not mean that other college savings options don't have fees and expenses. If you invest in mutual funds through an ESA or custodial account, you should check the fee table in the prospectus to see how the costs of a mutual fund add up over time. If you invest in stock, make sure you understand how much in commissions you must pay and factor this into any gain you may make.

• Know the Risks As Well As the Rewards of Your College Savings Options

Compared to saving for retirement, your college saving timeline is relatively short. At most it may be 18 years. And for many people it's a lot less. This can impact your ability to weather a market decline and increases your risk.

Before investing in any college saving vehicle, carefully evaluate it and its investment options. Investment options with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your goals. To learn more about the investment strategy of investment options you are considering and their risk, you should read the following materials:

• 529 Plans. Read the offering circular or prospectus. It usually contains the investment strategy and risks of a 529 plan and its investment portfolios. Most 529 plans provide this document on their Web sites.
• Mutual Funds. Read the prospectus and shareholder reports. Prospectus and shareholders reports are usually available from mutual fund companies or your financial professional. Mutual fund prospectuses also are available in the SEC's EDGAR database.
• Stocks and other securities. Read a company's registration statement or annual (Form 10-K) and quarterly (Form 10-Q) reports. These are typically available in the SEC's EDGAR database. For companies that don't file in EDGAR, email the SEC's Public Reference Room to see whether the company has filed any documents with the SEC.
• Understand Your College Savings Plans Limitations and Restrictions

What happens to your college savings if your child decides not to go to college, you have another child, or you lose your job? These events and many others could dramatically impact your college savings strategy. Unfortunately, most college savings options have various restrictions and limitations that may impact your ability to react to a changing situation. Carefully review any college saving options you're considering to make sure they have the flexibility and control you feel you need.

Our College Savings Plan Comparison Chart will help you understand and compare the various restrictions and limitations of each option.

College Savings Plan Comparison Chart

For More Information

Internal Revenue Service (IRS). The IRS has information on the tax-advantage college savings options discussed here. Publication 970, Tax Benefits for Higher Education is a good place to start. It discusses 529 plans, ESA's, savings bonds, as well as tax credits and deductions for higher education expenses. You can find other information on their Web site, www.irs.gov. You also can call the IRS toll-free at 800-829-3676 to order publications.

College Savings Network. The National Association of State Treasurers' College Savings Plans Network Web site, www.collegesavings.org, provides information on 529 plans. Their site provides links to state 529 plan Web sites, information on state tax treatment, and other useful information. You also can call them toll-free at 877-277-6496.

529 Plans Sponsors. Most 529 plans allow you to directly invest through them. They provide you with offering circulars, applications, as well as a wealth of information on saving for college.

Brokers, Financial Advisers, and Mutual Fund Firms. Many brokers, financial advisers, and mutual funds firms work with one or more 529 plan sponsors and have information and materials on 529 plans. Most of these firms can also provide you with information on setting up ESA's and Custodial Accounts. Many firms also have Web sites that can provide you information on your college savings options.

NASD. We have a Web page devoted to 529 plans. In addition, you can check out if the firm or individual offering you a college saving option is registered with the NASD on our Web site or by calling our Hotline at 800-289-9999.

Bureau of Public Debt. The Bureau of Public Debt's Saving Bonds Web site provides everything from educational information to calculators to a direct purchase program for savings bonds.

FinAid! The SmartStudent Guide to Financial Aid. FinAid! The SmartStudent Guide to Financial Aid's Web site provides a lot of helpful information on financial aid.

Online Resources. You will also find a wealth of information about your various college savings options on the Internet.