How To Pay For College: Five Tips
Tips on how to pay for college is on the mind of any parent. Most parents are aware of the high cost of earning a college degree today. With that being said, many have not figured out how to pay for college and not break the bank at the same time. Tuition isn’t only the expense. Textbooks, living costs, extracurricular costs and technology costs can all add up quickly. Families simply aren’t prepared to pay for tuition, and it’s not necessarily their fault. In fact, only 56% of families are actively saving for college, according to data from Sallie Mae. In this article, we share some ways to help fund your child’s college education so that he or she can land a high-paying job and advance in a satisfying career.
If your child is still young, then you can start saving now for his or her future education. Some of the best high-yield savings accounts today pay nearly 2.5 percent APY. Even if you can’t save enough to cover four years of tuition, any amount you put away can help with all the other expenses like textbooks etc. The only downside to having a standard savings account is that it may affect your child’s ability to get financial aid benefits. In addition, it may not yield the best returns which will is not helpful if you’re trying to save quickly.
Apply for Scholarships
If your child is already in high school, then it may be too late to start saving enough money to make a difference for tuition. However, your child now has the chance to research relevant scholarships and start applying for them. To learn about scholarships, your child can visit the high school’s guidance counselor office or search the Internet. You’d be surprised to discover all the scholarship money that is available. Even more so if your child is from a minority group or has a niche interest. Applying for scholarships will take time and effort, but it can result in a significant amount of funds.
Consider 529 College Plans
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A tax-advantaged savings account that can be used to cover college-related expenses, a 529 plan gives parents the opportunity to invest after-tax money. The money is invested in low-cost stock and bond funds and can be applied toward expenses related to their child’s education. You can open a 529 plan as soon as your child is born. Also check at work, you may be able to access an employer-sponsored 529 plan depending on your employee benefits. The rules about 529 plans can vary by state, so you’ll want to research the specific laws in your state before moving forward with this option.
Coverdell Education Savings Accounts (ESAs)
Coverdell ESAs is a qualified tuition plan that can be set up for beneficiaries who are under 18 or have special needs. An interesting option is that friends and family can make deposits into the account. The max deposit amount for the year is $2k and the earnings accumulate tax-free. Furthermore, as long as the amount withdrawn does not exceed the eligible educational costs, the money is not taxed at the time of distribution.
U.S. Treasury Savings Bonds
Savings bonds may not have the highest interest rates but they are backed by the federal government. This means their security is guaranteed. The interest on these bonds are free from federal, state and local income tax when used for educational tuition. In addition, these bonds can be rolled into another qualifying tuition plan with no tax on the interest earnings.
Saving with tax credits
In addition to financial aid, you can also get some savings by way of federal tax reductions. There are four tax breaks that are offered to both college students and recent grads. More information can be found here.
Student Loan Interest
If you have an unsubsidized loan and you are a current college student, you can claim a tax deduction of up to $2500 (this depends on your total income). If you are a recent grad, you can take advantage of this break as well.
The American Opportunity Credit and the Lifetime Learning Tax Credit are two available tax credits that can help you get some of your tuition money back. As a tax credit, you can subtract your eligible amount right off of your tax bill. In addition, you can choose which will be more beneficial to you.
- Lifetime Learning Credit: If your adjusted gross income as a family is $120k (married and filing jointly) or $60k for singles, you can qualify for a max credit up to $2k per return. With this credit there is no limit on the number of years you can qualify for it.
- American Opportunity Tax Credit: This tax credit maxes out at $2500 and is eligible for people that have an adjusted gross income under $80k or if you are a married couple and file jointly, you need to earn less than $160k. This credit is only available during your first four years of education.
This deduction can help reduce your taxable income by up to $4k. Your total income is what will determine how much you can deduct. This one is good for any students that do not qualify for the two tax credits mentioned above.
If you are a recent grad and find a job across the country, there may be some help for you. There is a deduction that could cover the cost of moving. Check out this form for more info: IRS Form 3903.
Take some time to check out the www.irs.gov or speak with a tax professional to see which credits and deductions you may be eligible for.
No matter where you are in your college savings journey, you always have options. Doing your research and planning ahead will help you make important decisions about your child’s education and how you’ll be funding it.