Getting money for college: Ways to save it or raise it

WAYS TO SAVE

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Coverdell Education Savings Account

What you do: Invest up to $2,000 a year per child in any mutual fund for education expenses.

Finanical-aid programs Federal Work-Study — The federal government gives money to colleges to pay students to work on or off campus during the academic year (part time) and in the summer (full time). Pell Grants — Federal money for low-income students. Maximum award: $4,000. Perkins Loans — Low-interest loans for students with the most need. Maximum amount: $4,000 for undergraduates. Repayment begins nine months after graduation. Stafford Loans — Low-interest student loans, both need- and non-need-based. First-year undergraduates are eligible for up to $2,625; second year, $3,500; third, fourth and fifth year, $5,500. Come in two forms: subsidized, need-based Stafford, where the government pays the interest while you're in school and six months afterward; and unsubsidized, non-need-based Stafford, where you pay the interest. Supplemental Educational Opportunity Grants — These federal grants for low-income students range from $200 to $4,000 a year. Disbursed by the schools, the money goes fast, so it pays to apply (via FAFSA) early. Washington Promise Scholarship — State and federal money awarded to low- and middle-income Washington students who maintain an excellent academic record throughout high school. Maximum award in 2003-04: $930. Washington State Need Grants — State and federal aid to low-income students. Maximum award for 2004-05: $4,650 for students attending private, 4-year colleges. Institutional Grants and Scholarships — The largest source of scholarships are colleges themselves. Western Undergraduate Exchange — Washington residents can get a discount from out-of-state tuition at some Western state schools if they qualify. Qualifications differ among schools, but many take into account test scores and high-school GPA. Eligible students pay 150 percent of the school's regular tuition, which is considerably less than nonresident tuition. www.wiche.edu/sep Federal PLUS Loans — Unsubsidized loans made to creditworthy parents. Lets you borrow up to the cost of college, minus what you receive in financial aid. Interest is variable but never exceeds 9 percent. No collateral required. You must begin repayment 60 days after you receive the loan. Merit scholarships — Based not on need but on a student's academic or personal talents. Sometimes referred to as "discounts," the scholarships often are used to entice students to attend.

Pluses: Coverdell accounts let you choose where to invest. Tax-deferred growth on earnings and tax-free withdrawals for education expenses. Covers expenses for elementary school through high school, as well as college. Benefits not used can be transferred to a sibling or other relative. Usually treated as parents' asset, meaning that it has a lesser impact on financial aid than plans that are counted as a child's asset.*

Pitfalls: Not available to singles earning more than $110,000 and couples earning more than $220,000. The contribution limit of $2,000 per year is a pittance compared to what some colleges cost.

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Section 529 College Savings Plan

What you do: Feed money — typically up to $11,000 a year per child for singles and $22,000 a year for couples — into a state-sponsored retirementlike account, without having to pay gift tax.

Pluses: Professionally managed. Distributions for college are tax-free. A couple can give up to $110,000 immediately and spread the gift over five years to avoid gift taxes. Most plans invest aggressively when your child is younger, then grow more conservative as college nears. Friends and family can contribute to plan. Usually treated as a parents' asset so has less impact on financial aid.*

Can be transferred to a cousin, sibling or other relative if child opts out of college.

Pitfalls: Some plans require steep fees — as much as 2 percent of the amount invested.

Comments: Washington state does not sponsor a Section 529 College Savings Plan. However, you can buy into other states' plans. Morningstar's research firm recommends five plans (free registration required). More info on a Web site that's gung-ho on 529s: www.savingforcollege.com

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Guaranteed Education Tuition Program (GET)

What you do: Prepay for all or part of college at today's prices.

Pluses: With the cost of college rising about 13 percent over the past year, the GET has proved to be a good investment. You can invest a little or a lot, and use the GET to help pay for any accredited college — even out of state.

Pitfalls: The contribution limit is the equivalent to five times the annual tuition and fees at the highest-priced, four-year public university in Washington state.

Also: Colleges count GETs as a resource and will reduce financial-aid eligibility dollar for dollar.*

Comments: To learn more about GETs: www.get.wa.gov/

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Uniform Gift to Minors Act Account

What you do: Set up a bank or mutual-fund account on behalf of your child, contributing up to $11,000 a year ($22,000 per couple) without having to pay gift tax.

Pluses: Money placed in these accounts doesn't have to be used for education. Plus, you can authorize withdrawal at any time. Children under age 14 earn $700 a year tax-free. The next $700 is taxed at the child's lower rate. Earnings above $1,400 are taxed at the parents' rate until the child reaches 14, when it's taxed at the child's rate.

Pitfalls: You lose control of the account when your child turns 21 and can legally spend the money on, say, a sound system or motorcycle.

Plus: Savings are considered the student's assets, so may reduce financial aid.*

WAYS TO RAISE funds if your children already are teens

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401(k) Accounts

What to do: Borrow up to half the funds ($50,000 maximum) for college.

Pluses: Money borrowed from a 401(k) plan is not considered income, so it won't count against your child seeking financial aid. And you get to keep any interest you pay on the loan, since you are borrowing from yourself.

Pitfalls: Most financial planners recommend that you fund your retirement before your children's college education. If you switch jobs, loan repayment is due immediately. You may also have to pay a 10 percent penalty.

What's more: Loans from 401(k) plans are repaid with after-tax dollars.

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IRAs

What to do: Tap your Roth IRA for college funds.

Pluses: Contributions may be withdrawn without penalty, tax-free, if used for higher education.

Pitfalls: Again, you might not want to jeopardize your retirement plans.

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Home Equity

What you do: Establish a home-equity line of credit and borrow as needed.

Pluses: Interest is relatively low and tax-deductible.

Pitfalls: If you default on the loan, you can lose your home. You also might not want to take on debt at this stage of life.

* Public colleges consider about 5 percent of parents' assets and about 35 percent of a child's assets available for college. So accounts controlled by parents, such as the 529 savings plans or Coverdell, have a softer impact on financial aid. Private colleges, however, may use a different formula.

Credit: Robin Tan, certified financial planner, KMS Financial Services; TIAA-Cref; Finaid.org; Kevin Schulz, independent financial planner.