In the past few weeks I've spent many hours reviewing the current college funding alternatives. I've tried to study them all - 529 Saving Plans, 529 prepaid tuition plans, Coverdell ESA, Custodial Accounts, Life Insurance and many more. And, I am more confused now than before I started.

The problem is the overwhelming complexity of all these alternatives. By doing it one way you can get a tax deduction. Other alternatives allow you to access the money tax free, as long as you use the money for college expenses. However, there are severe taxes and penalties if you don't use the money for college. And, many of these tax advantages may expire in 2010 unless Congress renews them. Then, there are more than 70 separate 529 plans to choose from. Almost every state has their own plan, with its own investments, regulations, fees and pricing. Plus, you give up control of your money in many of these alternatives.

Another big concern is the recent problems with these plans. For example, revenue-hungry states are competing for 529 assets and they're layering on marketing gimmicks, restrictive tax rules and higher fees. Sales loads have jumped from a typical 3 percent to 5.75 percent, and lofty expense ratios are increasingly common. According to Cerulli Associates, the average 529 plan generates $1 million in state fees for every billion dollars invested.

One of the biggest problems is how these alternatives relate to the college financial aid formulas. Many Middle American families are counting on financial aide to lessen their financial burden. Most financial aid formulas will reduce amount of free financial aid each year - by 35% of the money in the child's name and by 5.5% of the parent's assets.

By far one of the simplest and least problematic alternatives may be just over-funding a traditional cash value life insurance policy. First, there are the tax benefits. The cash values have the potential to grow on a tax-deferred basis and provide an opportunity for tax-free withdrawals. Parents can maintain control over the accumulation values. In addition most college aid formulas exclude assets held within cash value life insurance. This means that parents can have their policies grow tax-deferred, have tax-free access to the cash values, and not have the accumulation values reduce their financial aid. Plus, if your child does not use this money for college, there are no income penalties and you now have a tax-free retirement plan.

One of the biggest advantages of life insurance over all the other alternatives is that all of this occurs while simultaneously providing insurance protection in the event of the insured's untimely disability or death. Life insurance can assure the completion of a funding plan and guarantee that money will be available when your child is ready for college.

Our Found Money Managers™ can help you maximize your eligibility to qualify for college financial aid...

By Lew Nason

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.

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