Paying for College

College is expensive.  There is no getting around that one simple fact.  In one survey, it was determined that for the 2012-2013 school year, the average cost for an in-state public college was $22,261, and the average cost for a private college was $43,289.  Keep in mind that is a per-year cost, and included is the cost of tuition, fees, book, and housing.

Who thinks that the cost of higher education is going to go down?  Yeah, I don't either.

So what can you do to make college more affordable?

Of course there are academic and athletic scholarships.  If you can get any type of scholarship that is of course the ideal situation.  Not only is it "free" money, but it is non-taxable to the extent that it is used to pay for your tuition, fees, books, and other course-related supplies.

It is also very common to take out student loans.  There are a variety of types of student loans, but a common feature for tax purposes is that the interest paid on student loans is deductible.  This deduction phases out for single individuals with income over $75,000 and married couples with income over $155,000.

Already paying for college?  There are several federal tax credits that you can take advantage of.

• The American Opportunity Credit. This credit is worth up to $2,500 per year per eligible student.  This credit is available for the first 4 years of higher education at an eligible school.  You are able to claim the credit to cover the costs of tuition and required fees, books, and other course-related materials.   An added bonus with this tax credit is that it is partially refundable.  This means that you can get a tax refund of up to $1,000 even if you do not owe taxes.
   
• The Lifetime Learning Credit.  This credit is worth up to $2,000 per year per tax return.  The credit is available even after the first 4 years of higher education.

There are also several ways to help to save for college that have tax advantages.

• Savings Bond Interest Exclusion.  All of the interest income from Series I and Series EE bonds issued after 1989 are tax-free.  To qualify, the bond owner must have been at least 24 years old when the bond was issued, and the money must be used to pay qualified education expenses for yourself, your spouse, or a dependent.  This tax benefit phases out based upon your income level.
• 529 Savings Plans.  Your investment into a 529 Savings Plan grows tax-deferred, and the distributions from the plan that are used to pay for the beneficiary's college costs are tax-free.  With a 529 Savings Plan, the full value of your account can be used at any accredited college or university in the country.  Any non-qualified distributions are subject to a 10% penalty on the earnings and will be taxed.
• 529 Prepaid Plans.  Prepaid tuition plans are guaranteed to increase in value at the same rate as college tuition.  This means that tuition rates are locked in, offering peace of mind if you expect college tuition to rise. If the student attends an in-state public college, the plan pays the tuition and the required fees.  If the student decides to attend a private or out-of-state college, the plans typically pay the average of in-state public college tuition.  If a student decides not to attend college, the plan can be transferred to another member of the family.  529 Prepaid Plans are exempt from federal income taxation.  If no member of your family attends college, any non-qualified distributions are subject to a 10% penalty on the earnings and will be taxed.
• Education Savings Account.  Up to $2,000 can be contributed to a Coverdell Education Savings Account in any year.  The amounts deposited into the account grow tax-free until distributed, and the distributions are tax-free as long as they are used for qualified education expenses.  If a distribution exceeds qualified education expenses, the portion attributable to earnings will be subject to a 10% penalty and will be taxed.

If you have any questions, please do not hesitate to ask in the comment section below or send me an e-mail.

Do you know a high school athlete who is hoping to earn an athletic scholarship for college?  I can refer you to someone who will evaluate that athlete and help him or her get a scholarship.

I would also be happy to refer you to a great financial advisor who can discuss strategies for saving for your or your children's education.

I appreciate your feedback.  Please feel free to leave a comment below.