My friend died on Sept. 11. Should his wife establish 529 plans for their kids, even though they're likely to receive college aid?

QUESTION: My friend was a Port Authority police officer who died in the Sept. 11 attacks at the World Trade Center. His wife will receive his pension tax-free for the rest of her life, and the family lives in a small home, with an affordable mortgage and not many bills. The children, who are of grade-school age and younger, have a lot of options for college, so I don't think it makes a lot of sense for the family to invest in the tax-free college-savings options. If they attend school for free, they won't need to tap these accounts. What do you think?

-- Anonymous


ANSWER: As you already know, organizations have been extremely charitable in the wake of the Sept. 11 attacks, including providing college aid in the form of scholarships and grant programs. For example, the Families of Freedom Scholarship Fund and New York's World Trade Center Memorial Scholarship program were recently created to provide assistance with education costs. And various state legislatures have either proposed or already passed bills that would promise free state-college tuition for the children of the tragedy's victims. The families of uniformed police officers also have specific educational resources available to them, such as New York's Memorial Scholarship for Families of Deceased Police Officers, Peace Officers and Firefighters.

In short, you may very well be right, and these kids may be able to go to college at significantly reduced costs. Unfortunately, however, some of these sources for aid may eventually dissipate or may not be as generous as expected as time goes on. "It's dangerous to make assumptions," says Mari Adam, a certified financial planner (CFP) based in Boca Raton, Fla. As a result, your friend's wife should figure out now exactly what educational benefits her children are entitled to receive in the future, should they choose to attend college. While guarantees may be tough to obtain, a written assurance could come in handy further down the line.

You should also keep in mind that many of these programs will cover only tuition, and while that's very generous, tuition can account for as little as 25% of total college costs depending on the school, says Adam. Room and board is usually the largest remaining cost, along with books, supplies, transportation and other fees.

If only tuition is promised, or if the family is unable to determine definite sources of college funding, then a tax-free college fund like a 529 plan may actually be a good option, says Kevin McKinley, a CFP based in Eau Claire, Wis. After all, withdrawals can be used not just to pay tuition, but also for room, board and required supplies. These accounts can also be transferred from sibling to sibling, so a single account could be set up for the family. The family can even pass the money on to nieces or nephews. Also, while these children may have many options to receive a free or reduced-rate undergraduate education, says McKinley, they might choose to go on to graduate, law or medical school. "(These are) generally more expensive propositions," he continues, "and ones in which (this specialized) aid may not be available."

You're right though: If this family knows for sure that they'll have no education expenses for these children, then a 529 plan isn't the way to go. That's because any earnings withdrawn for noneducation expenses are taxable, and in most cases they'll also have to pay a 10% penalty on those earnings. If the child receives a scholarship, however, the penalty would be waived for earnings that are less than or equal to the amount of the scholarship.

A more conservative option is to split the college savings between a 529 plan and a taxable mutual-fund account held in the mother's name, says Sue Stevens, Morningstar's director of financial planning. While that obviously means more of a tax bite, she'll have full control over how the money in the taxable account is spent. She'll also have greater investment control, since 529 plans typically offer a limited number of options. Further, keeping the fund account in the mother's name could make it easier to get financial aid down the line. For suggested asset allocations based on a child's age, along with specific fund picks, see our College Portfolios.

Another option is a Coverdell Education Savings Account -- formerly known as an Education IRA -- which allows annual contributions of $2,000. That's obviously not much when you consider the price of college these days. Nevertheless, Coverdell funds can be used for a broad range of education-related expenses, and can even be applied to elementary- and secondary-school costs.

Finally, several financial-planning organizations have created resource guides and established support systems to help victims of the Sept. 11 attacks. You can obtain information about their services by going to the Web sites of the Financial Planning Association, National Association of Personal Financial Advisors and the American Institute of Certified Public Accountants.