Eduoption
529 Prepaid Program
Education Savings Accounts (IRA)
529 Savings Program
Main Differences Its a pure hedging instrument to cover any rise in the cost of education in the future. Exists in the form of an insurance or trust structure which allows the purchaser to receive full value of the education fees payable depending on conditions set. Tax incentives applies. Tax-free investment growth when you use the account to pay for a child's qualified higher education expenses. Taxpayer Relief Act of 1997 A simple State sponsored account setup to fund education fees. Some tax incentives may be available and amount secured by legislation up to 100 K.
Government Sponsors Private Sector in cooperation with various universities Yes but not insured and in most cases in the form of a legislated Trust. Yes Yes but not insured. Also varies from state to state.
Main Advantage The fees payable is guarantee at admission, even if the actual fee at that time is higher. Does not matter which university one wants to enroll in while as eduoption is university specific. Does not matter which university one wants to enroll in while as eduoption is university specific. Does not matter which university one wants to enroll in while as eduoption is university specific.
Disadvantages Need a vehicle to invest in the final amount. We believe the best vehicle is Education Savings Accounts and hence the right mix between what is payable now and later is important or, many company 401(k) plans allow employees to take distributions to pay for higher education. Otherwise, try UGMA/UTMA. Fees have to be locked with individual institutions. Once you invest your money in a 529 college prepaid plan, your investments will be managed by the state. In 2002, you will be able to change your investment direction once per calendar year. It's Not Enough on Its Own Even at $2,000 per year, the Education Savings Account alone likely won't pay for your child's education. It's only part of an overall financial plan Unlike other college savings options, which allow you to move your savings between various investments, once you invest your money in a 529 college savings plan, your investments will be managed by the state. In 2002, you will be able to change your investment direction once per calendar year. Because of this, it is important to compare plans before opening an account. We have seen funds dropped 35 % of its value.
Payment Structure One payment upfront as premium follow by final payment as agreed with University upon acceptance into course. Can be a lump sum payment or small payment on a monthly basis. Similar to insurance payment structure. $500 will increase to $2,000 in 2002 Paid in small monthly payment.
Risk Counterparty University concerned Depends on the securities invested. FDIC will provide up to 100K if invested in appropriate instruments like CDs which are under FDIC. Otherwise market risk and management risk Depends on the portfolio selected. FDIC will provide up to 100K if invested in appropriate instruments like CDs which are under FDIC. Otherwise market risk. FDIC will provide up to 100K if invested in appropriate instruments like CDs which are under FDIC. Otherwise market risk.
Payment of Fee Whatever the required tuition or fees as agreed today will be paid on acceptance and such payment shall be legally executed as having fulfilled the fees requirements under the contract and no other fees shall then be payable or solicited. The Trust or Insurance Company usually pays the "mandatory fee " amount. Other Fees such as Lab fees is excluded. However there may be some differences which may not be recognised. For example state funded institution may receive full amount for tuition but private institutions may received up to the state level only. In this respect the fund may only pay the amount invested plus some reasonable return. One need to read the master contract carefully. 1. Tuition, fees, academic tutoring, special needs services, books, supplies, and other equipment incurred with the enrollment or attendance of the beneficiary at a public, private, or religious school providing elementary or secondary education (kindergarten through grade 12), as well as college. 2. Room and board, uniforms, transportation, and supplementary items or services (including extended day programs) required or provided by such a school in connection with enrollment. 3. The purchase of any computer technology or equipment if the services are to be used by the beneficiary during any of the years the beneficiary is in school No hedging so one must hope that the amount available at that time is enough. The funds in the account can be withdrawn penalty-free if used for qualified expenses such as tuition, fees, supplies, books, and required equipment. In addition, room and board costs are included. The account owner is the only person eligible to authorize a withdrawal from a 529 account.
Your Money Invested in Initial Premium paid to University concerned. The final amount contracted must be invested either through a savings vehicle or a bond which will pay the required amount in the future. Paid to the insurance or trust fund and later use to buy stocks or bonds in order to get a better return. The final fees may be funded by new members funds. It works like an insurance scheme where it calculates the risk ratio of pay-out is less than pay-in in order for it to work. Also in wide range of securities which means expose to market risk. Will be invested by the state in whatever portfolio they see fit, also market risk Ready-made portfolios. Therefore, risk is market risk, ie short fall
Eligibility No restrictions and available to all including non US Citizens. Even the poor can afford to pay for the minimum premium $ 120 to lock in the future fee. May be restricted to residents of the state or country for state funded schemes but for private insurance may be open to all. Other conditions such as ninth grade cutoff for enrollment, residency requirements and the ten-year limit on use of benefits etc. Tends to favor those with income to pay for it. This option is available to you if you have a modified adjusted gross income (MAGI) below $160,000 for joint filers, or below $110,000 if you're single.1 A child under age 18 is named as the beneficiary on the account, with a parent or legal guardian named as the responsible individual. Available to all but certain tax advantages enjoyed by locals may be lost to foreigners. Depending on the plan, contributions can be as little as $25 or as much as $246,000. Anyone can contribute to an account, regardless of income level.
Universities Participation Depends on suitability but in theory no restrictions May be limited to selected state universities as prescribed within the contract since it guarantees full tuition fees. Foreign universities must meet certain criteria. All US universities, colleges and high schools. Depends on suitability but in theory no restrictions
Courses/Field The premium paid is dependent on the course or field selected and open to all courses. The payment is fixed for all courses hence a medical course fee is similar to a music course fee. NA Without any hedging instrument, have to provide for the highest possible cost.
Transferability Yes by way of an assignment of contract on an open market Yes but for "Member of the Family" . This means the definition of that term in Section 529 of the Internal Revenue Code..Other conditions such as the ninth grade cutoff for enrollment, residency requirements and the ten-year limit on use of benefits. Transfers to child when child reach legal age. The beneficiary can be changed tax-free and penalty-free as long as the new beneficiary is a member of the former beneficiary's family.
Refunds Refunds on initial premium to lock in the future cost will be set by individual universities and may be in full, partial or according to a schedule or none. The final amount is only payable on acceptance to the course which is exercise by the holder who has the right but not the obligation. Yes but may incurred taxation obligations under cancellation fee 10% and include what is deemed reasonable returns by the trust or insurance company less any benefits used. May also include other conditions in the contract schedule. Yes but 10 % penalty on earnings 10 % penalty withheld on earnings
Contracts Option Agreement with University Master Agreement with Trust or Insurance company Yes Master Agreement with fund manager and state governing body such as the "commission".
Fees

Transaction Fee $ 50

Min Premium Fee $120

Application Fee averaging 80-150

Min Fee average $45/mth for 5 years plan for community college fees for 1 year.

Late Fee 5 %

Cancellation Fee 10 %

 As per contract with respective fund managers As per contract with fund managers
Hedging Calculations based on Movement of actual course fees (standard deviation) and Interest Risk Free Rate Interest Rate or Reinvestment rate (rule of thumb is to use twice the Risk Free Rate) Savings Rate or Investment by the State as stipulated in contract Savings Rate or Investment by the State as stipulated in contract
Termination On expiry of option contract only Usually, a Contract terminates on the 10th anniversary of the date the Beneficiary is projected to graduate from high school. When child reach legal age (check with state) or when reach max of 30 years old Closure of account.
Flexibility We tailored the option program with each university to enable them to provide the best service to their clients ie students. Our option model can price all in cost including accommodations Very limited flexibility and includes other statutory requirements such as ninth grade cutoff for enrollment, residency requirements and the ten-year limit on use of benefits and same family member requirements etc. Although the account is in the child's name, the parent or guardian named as the account's responsible individual controls the Education Savings Account until all of its assets are withdrawn. No contributions may be made after the child turns 18, but the account can remain open until the beneficiary turns 30. If the funds haven't been used by that time, the account balance must be withdrawn within 30 days. In that event, applicable income taxes, plus a possible 10% tax penalty, would apply to earnings The account owner is the only person who can authorize a distribution from the account. The beneficiary can be changed tax-free and penalty-free as long as the new beneficiary is a member of the former beneficiary's family
Income limitations None None This option is available to you if you have a modified adjusted gross income (MAGI) below $160,000 for joint filers, or below $110,000 if you're single. None
Maximum Yearly contribution per beneficiary None 50K in the first year of a 5 year period without exceeding the annual federal gift tax exclusion $500 will increase to $2,000 in 2002 50K in the first year of a 5 year period without exceeding the annual federal gift tax exclusion
Account Earnings Tax Tax deferred Tax free if used for qualified expenses Tax deferred
State Tax deductible contribution No Varies by state No Varies by state
Taxation of Qualified Withdrawals Yes Tax Free, when used for qualified educational costs Tax Free Tax Free, when used for qualified educational costs
Qualified Use of Proceeds No limit Varies by state Any accredited post-secondary school in the U.S. Any accredited post-secondary school in the U.S.
Cost Comparison Click here NA NA NA
Source eduoption.com

Click Here (Note other states may have different criteria) Virginia was chosen as an example only

www.educationira.com

Taxpayer Relief Act of 1997

 Arizona Savings 529 Program

NOTE: The information provided above should not be considered tax or investment advice. While we believe the above information is accurate at the time of writing, one should fully review the full offering of all the above instruments carefully before making any investment decision.

10 Dec 2001.