Tips on Paying for College

Tips on Paying for College

Here are some helpful hints for parents in panic mode this fall about how to finance their children's college plans.

For some, saving money for a child's or grandchild's college education seems nearly impossible. Before you give up the battle, however, consider this: A high school graduate will earn an average annual income of $26,416. A college graduate will earn an average annual income of $34,000 to $74,000. For someone who works 40 years, that can add up to an additional $320,000 to $1.92 million in earnings. That's quite a return on an investment in a college education!

Saving for college may seem like a monumental task, but you don't need to save the entire amount overnight, and, chances are, you won't need to finance the entire expense yourself. Today, there are a multitude of loans, work programs, tax credits, and so forth designed to help put college within the grasp of nearly everyone. With a little homework, you can find all the options available to you.

Here are five sources of college funding to consider:

Grants and Scholarships: Grants and scholarships are awarded on a number of criteria, including grades, talent, heritage, race, and gender. Grants and scholarships can be offered locally, statewide, nationwide, and by particular colleges and universities. The internet, school counselors, and the financial aid offices of colleges and universities can provide a wealth of information on this topic. Grants and scholarships typically supplement college costs rather than cover total expenses. Therefore, it's important you take an active role in saving for your child's educational future.

Investments: Through the years, parents and grandparents have used savings bonds, zero coupon bonds, and growth-and-income mutual funds to help with educational expenses. All are excellent ways to save for a college education. In more recent years, however, several new tools to help save for or offset college expenses have been introduced. All make financing a college education easier than ever before.

Section 529 Plans: When you set up a Section 529 savings plan, you put money in specific investments, which are managed by the plan administrator. 529 plans can be established for a child or grandchild. When establishing a 529 plan, you choose from two options: (1) Prepaid tuition programs, where you buy future tuition credit--at today's prices --that's generally used at an in-state school; and (2) Savings plans, where your earnings are not taxed as they accumulate, and qualified withdrawals are free from federal income tax. Savings plans are the more popular of the two plans because they generally don't restrict students to certain colleges in specific states. Your plan contribution limits are high, and your withdrawals are free from federal income taxes, as long as the money is used for qualified college or graduate school expenses. (Section 529 tax benefits are only effective through 2010, unless extended by Congress. Also, a Section 529 plan could reduce your child's or grandchild's ability to qualify for financial aid. Because tax issues for 529 plans can be complicated, please consult your tax advisor.)

Coverdell Education Savings Account: Depending on your income level, you can contribute up to $2,000 annually to a Coverdell Education Savings Account. Your Coverdell earnings and withdrawals will be tax-free, provided you use the money for qualified education expenses (tuition, fees, tutoring, special-needs services, books, supplies, computer equipment, room and board, uniforms, and transportation). You can fund your Coverdell Education Savings Account with virtually any investment you choose--stocks, bonds, certificates of deposit, etc. Once a Coverdell education savings account is established, anyone--a family member, friend, or the child--can contribute to the account as long as he or she meets the adjusted gross income limits. And you can contribute to a Coverdell Account in the same year that you put money into a Section 529 plan.

Tax Credits: Even if you already have a child enrolled in college, help still may be available. The Hope Scholarship Credit and the Lifetime Learning Credit are tax credits that can be used to offset college tuition and fees. The exact amount that can be claimed depends on your family's income, the amount of qualified tuition and fees paid and the amount of certain scholarships and allowances subtracted from tuition.


"Last-Minute" Options

If you have a college-bound senior in your house and you haven't saved as much as you would have liked, don't despair. Even at this late date, you can take some steps to help pay those college bills. Here are a few ideas to consider:

Remember, you don't have to pay the full year's tuition, room and board up front. You will likely be billed in installments that may correspond to the school's quarter or semester system. This payment system doesn't lessen your overall costs, of course, but it does give you a bit of time to come up with additional funding sources. For example, if you have a bond coming due in the middle of the college calendar, you can use the proceeds to help pay for school.

Liquidate assets in timely manner. If you've earmarked certain investments for college, try not to liquidate them until it's absolutely time to write out a check. The longer you can keep your investments growing, the better off you'll be.

Look at a Roth IRA. If you have a Roth IRA, you can withdraw contributions, tax- and penalty-free, to help pay for your child's education. Certain conditions apply to penalty-free withdrawals, so you should talk to your tax advisor for more information. And keep in mind, if you start withdrawing earnings, you'll have to pay taxes on them unless you meet certain conditions.

Putting together a good college-funding plan--either at the last minute or years in advance--can test your resources and ingenuity. But by diligently exploring all your options, it's a test you should be able to "pass."

Provided by: Lauren Kahn, M.A. from Lone Star Ed Consulting. www.lonestar-edconsulting.com
512-294-6608
Written by: Randy Loren (www.randyloren.com). He has more than two decades of experience in many areas of business and finance, and is currently a financial advisor for Edward Jones and a sought-after motivational speaker who educates high school students on the value of financial literacy and sound money and work practices. He is author of a new book, Climbing the Money Mountain: The Young Adult's Guide to Reaching Your Financial Peak (FN Publications, $19.95).