This Issue: College Money for Everyone

Done right, the Coverdell Education Savings Account Can Pay for All of Your Child's College Costs

As a parent, planning for your kids' education can be worrisome and confusing. Gone are the days when you could just drop some money in a mutual fund and wait 18 years.

But there are still great vehicles out there to get you where you want to go. And a Coverdell Education Savings Account (ESA) might be just what you need. The ESA (formerly known as the Education IRA) has become a very attractive college savings vehicle for many people. This even includes families who wish to save for elementary and secondary school expenses (as many K-12 expenses were added to the list of qualified expenses).

How It Works
The parents or grandparents of a child can contribute a combined amount of $2,000 annually, per child, until the child reaches the age of 18. If a child is under age five, there is ample time to accrue enough money for their college years.

Contributions made to an ESA are not tax deductible, but if distributions are taken to pay for education, there is not tax on the distributions. And as mentioned previously, you can even use tax-free distributions for elementary and high school costs.

Fund College Accounts as Soon as Possible
If you made a monthly contribution of $166.66 to an ESA--beginning when a child is born--it would grow to over $126,306 (assuming a 12% annual return) by the time that child reaches 18 years of age! This is ten times more than the amount you would accumulate if you waited to begin contributions until the child becomes a teenager. That's why it's important to fund your college accounts yesterday--not tomorrow.

Plan Provisions
Even if you like other plans (such as the 529 plan) it's a good idea to contribute the first $2,000 of savings for each child into an ESA. But before you move forward, here are some provisions to be aware of:

• Tax law prohibits ESA funding once the beneficiary reaches age 18.
• In 2002, the contribution limit was increased from $500 per child to the much more reasonable level of $2,000. However, you need to be careful when accounts are established by different family members for the same child. If total contributions exceed $2,000 in a year, a penalty will be owed.
  
  For example, if the grandparents of a child decided to contribute $300 into their grandchild's ESA, the parents would be limited to contributing a maximum of $1,700 (for a total of $2,000).
• Your contribution goes into an account that will eventually be distributed to your child, if not used for college. You cannot simply refund the account back to yourself like you can with a 529 plan. This means you lose some degree of control.
• The account must be fully withdrawn by the time the beneficiary reaches age 30, or else it will be subject to tax and penalties.
• Unless Congress acts, certain ESA benefits expire after 2010. K -12 expenses will no longer qualify, and the annual contribution limit will be reduced to $500.

Finding a Coverdell ESA Provider
If you know how a Roth IRA works, then you have a pretty good idea of how an ESA works. They both allow you to make an annual non-deductible contribution to a specially-designated investment trust account. Your account will grow free of federal income taxes, and withdrawals from the account will be completely tax-free as well. But it's important to remember that an ESA is an investment vehicle targeted to education expenses, not retirement.

And just like an IRA, you have a wide variety of providers to choose from for ESAs. The best way to find one is to do an online search. Look for providers who charge an annual maintenance cost of $10 or less. It's also preferable that the ESA have low minimum contribution requirements.

As you can see, the Coverdell Education Savings Account is a great vehicle to take the worry and confusion out of saving for your children's education. But don't wait to look into it. The sooner you fund the account, the more you'll have at withdrawal time.

College Scholarships Are Available for Everyone

There are hundreds of thousands of scholarships available from many different sources, including private organizations and schools. But thousands of them go unclaimed each year--even as many students struggle to simultaneously work and pay for college. Too many students work full time while attending school when they could be getting free money instead.

Did you know there are thousands of scholarships available to anyone who can qualify? It's true. Often times, there is no competition, as many scholarships are simply unknown. Most people either don't know such scholarships exist or they never think to search for them. Thousands of dollars go unclaimed each year as scholarship deadlines come and go without a single applicant.

And that's a shame. Scholarships are free and can be used to pay for any higher education costs, such as tuition, books and living expenses. Best of all, this free money never needs to be repaid!

Types of Scholarships
Before discussing how to find scholarships, let's look at scholarships in general. The five most common scholarships can be classified as:

1. Student-specific: These are scholarships where applicants must initially qualify by race, gender, religion, family and medical history, or many other student-specific factors.
2. Merit-based: These scholarships are based on a student's athletic, academic, artistic or other abilities, and often factor in an applicant's community service record and extracurricular activities.
3. School-based: These are scholarships offered by colleges, and are often for larger amounts than private scholarships.
4. Career-specific: These are scholarships awarded by a college or university to students planning to pursue a specific field of study.
5. Need-based: These scholarships are based on the student and family's financial record.

Finding Scholarships
Not too many years ago, students tediously poured through library reference books in search of scholarships. These days, the advantage of using Internet search engines make it much easier and less time-consuming for students to find what they're looking for.

These tools typically ask 10-20 or more questions to build a student profile against which it will attempt to match scholarships. The questions will ask about test scores, GPA, family income, age, ethnicity, religious affiliations, disabilities, student activities, civic organization affiliations, etc.

Below are some suggestions on how to make the best use of these tools:

• Use FREE search tools - Search tools that charge a fee are no better than free ones. The only downside to free search engines is that they may use your information for marketing purposes.
• Start early - Many scholarships have deadlines in the fall so begin your search ahead of time.
• Use more than one search tool - Although most scholarship databases have substantial overlap, there are sometimes scholarships that appear in one database and not in another.
• Avoid application fees - Most scholarships that charge an application fee should be ignored, as they are often scams.
• Scholarship match tools aren't perfect - Searchers can't assume that they are eligible for all the scholarships that are returned from a search tool; they'll still need to review the requirements.
• Keep looking after college starts - If a student changes majors, becomes involved in new activities, or his/her financial situation has changed, more scholarships may become available. Even if there have been no changes, new scholarships are often added. So keep looking.

Think Local
In addition to using the Internet, students should also look for local scholarships. It is typical for students to find scholarships in their home region, and oftentimes these won't be listed in any Internet database. Local scholarships tend to be less competitive than those available nationwide (because the eligible population is smaller).

For example, local libraries and recreation departments may offer information about local scholarships. Students should also ask about scholarships at religious or civic organizations in which they are involved. They may even want to contact larger local businesses to ask if they offer scholarships to local students.

Here's other places to look:

• Non-profits, volunteer organizations, and charitable trusts
• High school guidance counselor
• Parent's or student's employer
• Community foundations
• Labor unions
• Religious houses of worship
• Chambers of commerce
• Local college and universities

Unique Hobbies, Interests, and Characteristics Everyone is unique, and some of the best scholarships available are for students with distinctive interests, abilities, or family histories. Just to show you how all-encompassing scholarship opportunities are, here are a few outrageous examples:

• In the Chick and Sophie Major Memorial Duck Calling Contest, applicants show off their best duck calls in competition for scholarship money.
• Tall Clubs International offers a scholarship to men who are taller than 6'2” or women who are taller than 5'10”.
• Duck brand duct tape offers scholarships based on the imaginative usage of their products. In one case, duct tape as prom clothing!
• The Excellence in Predicting the Future Award offers money for college to students who can predict future events!
• The Scholar Athlete Milk Mustache of the Year Award awards free college money to students who enjoyed athletics, community service, and academics--as well as milk--throughout high school.

It is impossible to give examples of all the scholarships available to everyday students each year. But with every individual's qualities being celebrated in our modern era, money is available to everyone. Don't let yours go unclaimed any longer. If you look, you'll find something.

Scholarships for Student Loans
After graduating from college, many students find they are unable to meet the financial obligations of their student loans. The good news is that students who majored in and are employed in certain fields may be eligible to take advantage of a student loan scholarship.

Such scholarships give individuals the opportunity to have portions of their student loans cancelled in exchange for service in certain fields and/or locations. Some of the most common include:

• Teachers
• Nurses
• Military
• Public Service

While the amount of money that can be cancelled or forgiven for such programs tends to vary, individuals are generally able to have more money forgiven for increased periods of time of service. In some rare cases it may even be possible for 100% of a student loan to be forgiven. If you are a graduate with a student loan, check into student loan scholarships. Chances are you will qualify for some type of grant you had no idea existed.