There’s no question that the cost of college can be intimidating, especially if you have more than one child. And paying for college may be more manageable than you assume if you plan ahead. You can also investigate a number of ways to control the cost.
While tuition may be the largest single expense of attending college, it isn’t the only one. Whether students live on campus or commute from home, they must pay for books, food, transportation, and other expenses — many of which aren’t covered by scholarships or loans. While these costs apply no matter where your child attends, you’ll find that they vary, just as tuition does, from school to school. You may want to ask your child to weigh those differences in making his or her final decision, along with choices between a rural or urban campus and a large school or a small one.
TUITION: The charge for instruction, including salaries, facilities, and the general operations of the institution. Public, tax-supported schools usually cost less than private ones.
ROOM: Housing in the dorms. Other housing options, such as apartments, fraternities, and sororities, may not be billed through the college, but the costs are comparable.
BOARD: Dining hall meals. Most schools offer several different plans, at different costs. Students who don’t live in college housing may pay for food individually.
ACTIVITY FEES: Extra money for clubs, the yearbook, school newspaper, and graduation. Everyone pays a standard fee, though it varies from college to college.
You may qualify for an American Opportunity Tax Credit (AOC) for up to $2,500 you spend on a child’s educational expenses if he or she is enrolled at least half-time in a qualified higher education institution and pursuing the first four years of a degree or other credential. Qualified institutions include liberal arts colleges, universities, and vocational, trade, or technical schools. You may take the credit for your own expenses or those of your spouse, with the same conditions. You can use the credit for the first four years of post-secondary education. In addition to tuition and fees, you can also apply the credit toward course materials. The credit is available for each eligible student.
In addition, you may qualify to claim a lifetime learning credit of up to $2,000 each year for other qualified higher educational expenses, including your own. The course work doesn’t have to be part of a degree-granting program, though it can also be used for postgraduate or professional studies. You can take both credits in the same year, but not for the same person.
You can take only one lifetime learning credit per year, even if you are paying for more than one person’s education. But if two students are enrolled in the first four years of post-secondary school at the same time, you can qualify for two AOC tax credits.
You’re eligible for the full amount of these credits if your modified adjusted gross income is less than the limit Congress sets for the year. Those limits depend on whether you file your tax return as a single filer or you’re married and file a joint return. The credits are phased out gradually and then eliminated for people who earn more than the annual ceiling. The amount of the credits and the income levels tend to increase gradually to reflect inflation.
You can get more information on all the tax benefits for education that you may qualify for on the IRS website (www.irs.gov) or in IRS Publications 553 and 970, which you can download from the site.
Tax-wise investing for a college education
You might want to investigate some of the specific investment options designed to help you save for college expenses. You can get helpful, up-to-date information on the website of the US Department of Education (www.ed.gov).
Education savings accounts. You or another relative or friend can contribute up to a total of $2,000 per child per year to a Coverdell education savings account (ESA) set up in the child’s name, provided your adjusted gross income for the year is less than the cap the government sets. The earnings in the account are completely tax free if the money is used to pay qualified education expenses, such as tuition and room and board, anytime before the beneficiary reaches age 30. You can also use money in an ESA to pay qualified expenses for children in grades K-12. You can check the limits at www.irs.gov.
US savings bonds. Interest earnings on certain US savings bonds are completely tax free if you use the money to pay your child’s qualified higher education expenses. However, there is a ceiling on the amount of income your family can be earning at the time you cash in the bonds to qualify for the tax break. There are also other restrictions on purchase and ownership. You can get information at www.savingsbonds.gov.
529 college savings plans. You can contribute to a state-sponsored 529 for a child, grandchild, or any other person including yourself. These plans are sponsored by individual states, and each is managed by a financial services firm. The investments vary by plan, as do the costs and the contribution limit, so it’s smart to compare. There may be tax advantages in choosing the plan your home state offers, but in most cases you don’t have to be a resident to use a particular state’s plan. You contribute after-tax money but withdrawals are tax free if they’re used to pay qualified higher education expenses for students of any age. In addition, you can now take a tax-free withdrawal of up to $10,000 each year to pay tuition at public, private, or parochial schools for children in grades K-12. You can find more information at www.collegesavings.org.
529 prepaid tuition plans. Many states and a consortium of private colleges and universities offer prepayment plans that allow you to buy tuition credits at today’s prices to be used, tax free, when your child or grandchild is ready to enroll. You or the beneficiary may have to be a resident of a sponsoring state, and the credits may apply to only specific institutions. Credits you purchase through the Private College plan can be redeemed at any college or university that is a member of the plan, provided the student is accepted at that institution. You can find more information about private college plans at www.privatecollege529.com.
Saving in a child’s name
Any adult can save for college by opening a custodial account in a child’s name under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). It’s smart to consult your tax and legal advisers, though, before you make this choice to be sure it makes financial sense for you and your beneficiary. Changes in the law mean that the tax advantages that formerly applied to custodial accounts have been significantly restricted for students younger than 24.
One advantage of an UGMA or UTMA is that you as the donor or the person you name to oversee the account can choose how to invest the assets in the account, and you can move assets you own into the account without having to sell them, which might result in a potential capital gains tax. That’s not an option with a 529 college savings plan or an ESA.
But using an UGMA or UTMA can backfire if the child applies for financial aid. That’s because these accounts are considered assets of the child and most financial aid formulas require students to contribute 20% of their savings toward college costs, while parents are required to supply less than 6% of theirs. The other drawback is that once the child reaches the age of majority (usually 18, 21, or 25 depending on the state and the type of account), he or she has the right to assume control of the account and spend the money.
If you don’t have as much as you need to pay for higher education, schools may offer your child a package of aid:
Scholarships or grants, which do not have to be repaid.
Loans, which must be repaid, but usually not until after graduation. Working in certain jobs or locations can reduce the loan or postpone repayment.
Work/study grants, which pay the student for work done on campus during the school year. Sometimes earnings are deducted from tuition and other times the student earns a salary.
This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.