There are various other ways to save for college, including simply saving and investing money yourself.  This allows you to keep control and flexibility with the savings.  When the time comes to pay college expenses, these amounts can be paid without any gift tax consequences, since the Internal Revenue Code allows what would otherwise be taxable gifts (gifts exceeding the annual gift tax exclusion amount, which is $11,000 per year for gifts made in 2003) to be paid as tuition and other college expenses if they are paid directly to an educational institution. However, there are three major problems with this method.  First, since the funds will not be placed in a special savings vehicle as described above, the funds will not grow tax-deferred.  In other words, the funds will be taxed as they grow, meaning that they will grow at a slower rate than funds similarly invested in tax-deferred vehicles.  Second, the funds will be includable in the person’s estate if they die before the funds are used to pay for the minor’s education.  Third, the funds are not protected from your creditors if you have to declare bankruptcy before your child reaches college age.  (Of course, the money is available to pay your creditors, which may keep you out of bankruptcy).

Last updated on January 6, 2011 by Glenn Karisch