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Life Insurance. You shouldn't purchase life insurance unless you need protection. If you have a permanent life insurance policy paid with fixed annual premiums, you generally have the option of borrowing against its cash value. Of course, the amount of cash value available to borrow against varies, depending on the specific policy. The death benefit will be decreased by the amount of the outstanding loan. The interest rate charged on such loans is often reasonable, and in many cases you can pay back the loan on a flexible schedule. Talk to your financial services representative about the advantages of life insurance when planning your child's college education. Prepaid Tuition Plans (529 Plans). Certain states, such as Alabama, Alaska, Colorado, Florida, Massachusetts, Michigan, Ohio, Pennsylvania, Tennessee, and West Virginia offer various types of prepaid tuition plans, generally for students attending state schools. Residents of these states can buy a contract or bonds at a fixed price, based on the rates of college tuition today. Payments can be made in lump sums or monthly installments. The state, in turn, invests the money to earn the difference between the amount you are paying and the projected cost of tuition at the time your child reaches college age. Those who sign up are fully protected, as the state assumes all the risk of the investments. Check with your state's commission on higher education to see if a prepaid tuition plan is available where you live. Prepaid tuition plans are not for everyone. They mostly attract middle-income families who tend to be more conservative in their investments. Lower-income families using this option may jeopardize their chances for state aid and forfeit money needed for immediate essentials. If you're interested and a plan is offered in your state, you'll want to know if it covers only the cost of tuition, or room and board, too. Also, check to see if it applies to other than state schools. Finally, confirm that your original deposit will be returned if your child attends a private or out-of-state college, is not accepted at a state school or chooses not to attend college at all. College Savings Plan (529 Plans). Certain states such as Connecticut, Iowa, Kentucky, Louisiana, Massachusetts, New Hampshire, and New York offer college savings plans. These plans, also known as 529 Plans for part of the United States Code that governs qualified state tuition programs, allow the contributor to save as little or as much as they like on behalf of a designated beneficiary's qualified education expenses. Contributions, considered gifts by law, may be as little as $25 or as much as $50,000 ($100,000 for joint filers) in one year, of a five-year period, without incurring gift taxes, assuming no gifts are given to the same beneficiary within five years. These accounts vary from state to state. Some may guarantee a minimum rate of return, others offer tax incentives, and most generally provide tax-deferral and favorable tax treatment upon withdrawal. Currently, money withdrawn for qualified education expenses is taxed at the child's rate. Beginning in 2002 the law will allow tax-free distributions from state plans for qualified education expenses. Unlike pre-paid tuition plans, the monies from the account may be used at any qualified institution of higher learning within the United States. If your child does not go to college, the money can be used for another family member's qualified education expenses or you may keep the money and be taxed at your rate plus a 10% penalty. Check with your state's commission on higher education to see if a college savings plan (529 Plan) is available where you live. If your state does not have a savings plan, many states have opened their plans to non-residents. Several private plans have also been developed. Hope Scholarship Credit. Generally, this credit will reduce your tax up to $1,500 per year of the cost of tuition and fees paid during the first two years of post-secondary education for joint filers with adjusted gross incomes of up to $80,000 and single filers up to $40,000. This credit phases out as you adjusted gross income increases and you are not eligible for this credit if you joint income is above $100,000 and single income is above $50,000. Lifetime Learning Credit (LLC). Generally, this credit will reduce your tax up to $1,000 of college tuition and fees per year through the year 2002 and $2,000 each year afterward. To qualify for the full credit, a taxpayer would need to spend $5,000 on qualifying expenses through 2002 and $10,000 each year after. Parents with more than one child may claim a LLC for one child and HOPE credit for a different child in the same year. The two credits, however, may not be claimed in the same year for one child. Deduction for Qualified Higher Education Expenses. The new deduction, available in 2002, allows taxpayers to deduct $3,000 of qualified higher education expenses. The deduction, scheduled to increase $4,000 before being eliminated in 2005, is phased out for joint filers with incomes between $130,000 to $160,000 and may not be used in the same year as the Hope Scholarship Credit and Lifetime Learning Credit.

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