College Savings: Follow the Obamas?

Normally, financial contributions from parents to children above a certain amount are subject to gift taxes -- but under 529 plans, parents can make larger contributions and prorate them over five years so that the annual, prorated amount is below the gift tax limit. (For 2009, according to the IRS, the most an individual parent can give a child without triggering the gift tax is $13,000 or $26,000 per couple.)

If the Obamas had taken that $240,000 and invested it elsewhere over the next five years, they could face tens of thousands in taxes.

Most Americans, of course, can't afford to invest nearly as much into college savings plans as the Obamas have, especially during this recession.

Laura Lundberg told that the downturn in the economy has forced her to cut back significantly on how much she invests on one of her sons' 529s, and said she hopes she can prevent her financial situation from getting so dire that she has no choice but to liquidate the fund altogether.

Lundberg and her husband, both 43, set up a 529 for their now 15-year-old son Matthew three years ago, with every intention of contributing $1,200 to it every year.

"Now we're looking at maybe contributing $200 for this year, that's how bad it's gotten," said Lundberg, who estimates that her husband's commission-dependent salary from a heating and cooling company will fall about 40 percent this year because of the struggling economy.

"It is very stressful," said Lundberg, who lives with her family in St. Peters, Mo. "My son is 14th in his class right now, which is awesome, but he's only a freshman and we don't know how he'll finish by the time he's a senior."

Lundberg said she worries about the day when she has to tell her son Matthew that they simply cannot afford to send him to Duke University in North Carolina -- the school she says he has his heart set on.

"I know that in two short years we're going to have to fill out the financial paperwork for colleges and when Matthew sees the bottom line, he'll realize," said Lundberg. "He'll realize just how much isn't there.

"Knowing how much college is right now and knowing it's not going to go down and that it's looming in the distance is hard," she said. "I don't know how we're going to make ends meet without leaving him in debt."

Lundberg's other son, who is just 11 years old, isn't likely to have a 529 to benefit from, thanks to the family's waning income.

"Unfortunately there is just no possibility of a 529 for my other son right now," said Lundberg.

"The dream of sending our children to college is becoming more distant every day," she said. "With the economy the way it is now, I can't see any possibility of putting more money in the account for a long, long time."

Lundberg is not alone.

Will the Recession Cut College Savings?

Joseph Hurley, the founder of and the vice president at Bankrate, said that, according to his research, people have been investing fewer of their hard-earned dollars into their children's' education as the economy has plummeted over the past year.

"Contributions are down partly because people don't have the money anymore," said Hurley. "They've lost their jobs."

"Also, some people are just frozen into inaction, they're scared," he said. "They don't want to make an investment decision."

Companies that administer multiple state 529 plans -- like Oppenheimer Funds and Vanguard -- present a more mixed picture.

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