by Shawn Regan

For anyone facing tuition, the news hasn’t been good. Education costs are rising faster than the economy is growing. Endowments are still recovering from the stock market swoon, so many schools have reduced financial aid and raised tuition. And the fed- eral government has changed the formula used to calculate how much families are expected to pay for higher education. This will reduce federal, state and school grants, with higher-income families affected most.

Help can be found, though, in the form of the Coverdell Education Savings Account and the 529 College Savings Plan (named after its section in the tax code).

“Coverdell accounts and 529 plans are the two big, tax-advantaged education-savings vehicles,” says Matt Dickerson, a regional sales consultant with Thrivent Financial for Lutherans. “It used to be that you couldn’t have both, but now you can.”

Similarities and Differences
State-based 529 plans are truly college saving plans, as they cover only higher education costs. Coverdells, on the other hand, can be used to cover tuition and expenses for K-12 education, too, thanks to a 2002 rule change. For federal tax purposes, Coverdells and 529s are treated similarly: Contributions are not tax- deductible, but withdrawals for qualified educational expenses are tax-free.

“With Coverdells being good for elementary and secondary school costs as well as for college, they’re a great way to teach your children about saving and to give them that sense of accomplishment that comes from helping put themselves through school,” says Libby Tate-Greiwe, a Thrivent Financial associate in Cincinnati. With both plans, no family relationship is required between contributor and beneficiary, and funds can be transferred to another beneficiary in the same family—a nice feature, should one child forgo college.

Because each state chooses its 529 plan administrator, investments in 529s are limited to what is offered by the administering company. With Coverdells, savers can choose the investments they please.

“The Coverdell makes for a good option because you can build some decent diversification with a wide selection of stocks, bonds and mutual funds,” says Matt Kley, Thrivent Financial associate in St. Peter, Minnesota.

Contributions and Control
Thanks to a rule change in 2002, the annual contribution limit for Coverdells is now $2,000 per beneficiary, up from the original limit of $500. With 529s, annual contribution limits are defined by the states and are often much higher than the Coverdell’s. Also, lump-sum contributions to 529s can be exempt from federal gift tax, up to $55,000 over a five-year period.

With Coverdells, the contributor controls the account until the beneficiary turns 18, at which point control switches to the beneficiary. With 529s, control always resides with contributors, such that they can even transfer funds back to themselves. The result is that a Coverdell is considered a student’s asset at both the federal and school aid levels. This can decrease the student’s qualification for financial aid.

A 529, at the federal aid level, is considered the contributor’s asset. This can increase a student’s chances of accessing financial aid. But, at the school level, some institutions consider 529s to be beneficiaries’ assets, which can reduce a student’s access to financial aid.

Know This
“With a Coverdell’s ability to fund kindergarten through college, it is more flexible than a 529,” Dickerson says. “But with a 529, you’ve got more control because, unlike a Coverdell, it remains the contributor’s asset.”

Remember that Roth Individual Retirement Accounts also can provide tax-advantaged withdrawals of contributions or conversions to pay for you or your children’s qualified higher education expenses. (When it comes to withdrawing earnings, those younger than 591/2 will have to pay taxes—but no penalty.)*

Thrivent Financial also offers cash-value life insurance contracts that can be tapped tax-free to help with education expenses. One example is a Variable Universal Life (VUL) contract, which you can overfund—within IRS limits—by paying in more than the required premium. Thereafter you can make tax-free withdrawals of all premiums.*

Dan Tresemer, senior financial consultant with Thrivent Financial, and Kyle Witt, financial consultant with Thrivent Financial, both in Geneva, Illinois, highlight some of the benefits of using a VUL in this way. “For people with children,” Tresemer says, “the VUL fulfills their need for insurance and investment, especially if they’re blessed with income that exceeds Coverdell and Roth limits.”

Witt adds: “We write a lot of VULs for people in their 20s and 30s. The younger you are and the more time you have to save for a goal, the better a cash-value life insurance contract looks.”IT

Shawn Regan is a Minneapolis-based freelance writer.

“Coverdells are good for elementary and secondary school costs, as well as for college.” —Thrivent Financial Associate Libby Tate-Greiwe

*A surrender charge may apply.

The 529 College Savings Plan is offered through an outside brokerage arrangement with Thrivent Investment Management Inc. Union Bank and Trust Company of Lincoln, Nebraska, is the administrator for this plan. Funds invested in the 529 College Savings Plan have no bank guarantee, are not FDIC insured and may lose value. Distributions from 529 plans are currently tax-free. However, they are subject to the sunset provision of EGTRRA, so the earnings portion of distributions will be taxed at the student’s rate beginning Jan. 1, 2011. A $55,000 gift is viewed as an accelerated gift over five years. Any other gifts made to the same beneficiary by the contributor within the five years may result in a federal gift-tax liability. If the contributor dies within the five-year period, a prorated portion of the contribution may be included in their taxable estate.

Been There, Saved That

Saving for college is step one. Saving at college is step two. Two 2004 graduates—Libby Tate-Greiwe of Miami University in Oxford, Ohio, and Matt Kley of Luther College in Decorah, Iowa—scored grade “A” money management skills throughout college. It’s no surprise, then, that they’re now sharing those skills with others as Thrivent Financial associates—Tate-Greiwe in Cincinnati and Kley in St. Peter, Minnesota. Their penny-pinching advice?

1. Keep one credit card for emergencies and live on cash. It’s much easier to track what you’re spending.

2. Price shop for housing and find a roommate.

3. Second-hand stores are a great place to find deals—especially on furniture.

4. Go generic. Cereal is cereal—don’t pay twice as much just for the brand name.

5. No $4 lattés! Make your own coffee—you could save $40 a week.

6. Buy used books and shop for them on the Internet, which often beats campus bookstore prices. Network with friends to share books, too.

7. Campus entertainment freebies. Forgo cable TV. Most schools have lounges where you can watch the big event with your friends for free.

8. Calling cards help you keep closer tabs on what you’re spending.

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