Here we are in the summer of 2016 already. If you have children or grandchildren in pre-school, elementary-school, middle-school or even high-school, you may or may not be thinking about their college education yet, depending on their age. It is never too early to start planning, however. The cost of higher education can be daunting, to say the least. According to the website collegedata.com, the average yearly budget for an in-state public college is $24,061 and for a private college is $47,831. This includes such things as tuition, fees, room and board, books and supplies, as well as transportation costs. These numbers can cause many to hit the panic button, especially if there is more than one college-bound student in the family.
So, with the rising cost of education, is all lost? Not at all! There are various resources and options available to consider. This article will look into a few of those options.
One option available is merit-based aid. This is aid based on academic or talent-based performance and not financial need. These scholarships can come from the school itself, outside scholarship providers, employers, and service organizations.
Another option available is need-based financial aid. For some families, this is a major source of college financing, but not all families will be eligible. This may include aid such as federal or state-sponsored scholarships, grants, etc.
A third choice is student loans. There are Stafford loans, Federal Direct PLUS loans, and private loans. Stafford loans have lower interest rates and, if subsidized by the government, the interest does not start accruing until the student is out of school. Federal Direct PLUS loans are loans available to parents of dependent undergraduate students and to graduate students. They are based on the borrower’s credit. Private loans, such as a mortgage, should be considered last after the other loan sources have been exhausted. Qualified student loan interest is an above-the-line deduction on your tax return and mortgage interest is deductible on Schedule A as an Itemized Deduction, if certain qualifications are met.
Then there are Qualified Tuition Programs (QTPs or 529 plans) and Education Savings Accounts (ESAs). These are savings plans to help cover the cost of education. Both provide for tax-free earnings and have contribution limits. Contributions to these plans are nondeductible for tax purposes and monies taken out of the accounts are nontaxable, if the funds are used for qualified higher education expenses, such as tuition, fees, room and board, books, supplies and equipment. QTPs do not have an income phase-out for contribution purposes, but ESAs do.
Once you have decided how to pay for college, keep in mind the tax benefits available. The American Opportunity Credit (AOC) is a great credit to take advantage of if you meet the requirements for claiming it. The AOC credit is up to $2,500 per student and 40% of the credit is refundable. The other 60% is used to offset tax liability. The AOC is available for a student’s first 4 years of post-secondary education.
There is also the Lifetime Learning Credit (LLC) available. This nonrefundable credit is 20% of up to $10,000 of qualifying expenses and limited to $2,000 per return. Unlike the AOC, which is only allowed for the first four years of undergraduate schooling, the LLC is available for most qualifying education.
The Tuition and Fees Deduction is another tax savings vehicle to consider. It is an above-the-line deduction of up to $4,000 of qualifying expenses paid.
Many of these credits and deductions should be compared to determine which is best to take advantage of on your tax return. Claiming one does not necessarily negate the others. There are many rules that must be taken into account before claiming a credit or deduction on your tax return. Many items have income limitations. The items discussed in this article may seem simple on the surface, but there are many variables and factors to consider. Please contact one of our knowledgeable tax professionals for further assistance or guidance.