A Primer for Paying for College

With college tuition skyrocketing, many parents are interested in learning more about saving and paying for college. So, whether your child is still in diapers or already has completed his or her first semester, get out your pencil and take note of these education planning strategies.

As Soon as Possible

The first step in college planning is to establish a goal. You need to look at all the potential expenses that will be involved in your child’s college education. College-related expenses begin even before your child is accepted into a school (think about testing fees, college visit costs and application fees).

College expenses include more than just tuition. If your child goes away to school, there will be room, board and spending money. A student living at home will have commuting expenses to and from campus. Add in student activity fees, lab fees, books and special equipment (notebook computers, for example, for some schools), and these non-tuition expenses can really mount up.

If your child is still young, you need to consider what impact inflation will have on what you end up paying for college expenses.

While the general inflation rate has averaged about 3 percent for the past 20 years, the average college-cost inflation has been about double that figure. Using a 6 percent cost inflation rate, the College Board, a national nonprofit organization, estimates that a child born in 2003 could need $160,000 to attend a public college for four years and $346,000 for fours years at a private institution.

Scary numbers, for sure. However, the College Board also reports that more than 60 percent of public college students — and more than 75 percent of private college students — receive some type of financial aid.

Below we summarize some of the steps you can take both before and after your child starts college to deal with the financial burdens of paying for a college education.

Before Your Child Starts College

Save with a Section 529 tuition plan.While contributions to these popular plans are not federal income-tax deductible, earnings from qualified state programs are now tax free, so more of your money will go towards tuition instead of taxes. And check out any state tax benefits that may result from contributing to your state’s program. High earners should note there are no maximum income restrictions on Section 529 plan contributions.

Contribute to a Coverdell Education Savings Account (formerly called an Education IRA). The maximum annual contribution is $2,000 per beneficiary if your and your spouse’s combined adjusted gross income (AGI) is less than $190,000.

Once Your Child Is in College

Take a tax deduction.In 2003, if your AGI is $65,000 or less ($130,000 for married couples filing joint returns), you may be able to take a deduction of up to $3,000 per year for higher education costs.

Claim a tax credit.A Hope Scholarship Credit of up to $1,500 a year may be available for the first two years your child is in college. Once you are no longer eligible for the Hope, the Lifetime Learning Credit provides a 20% credit on the first $10,000 of qualified expenses. Income limitations apply.

Transfer college credits from a less expensive college to a more costly school. Many prestigious, and expensive, universities allow students to transfer credits from more affordable two-year programs and apply them to a four-year degree.

Tap into your IRA or 401(k).To pay for qualified higher education expenses, you can make penalty-free withdrawals from your Individual Retirement Account before age 59½. If your 401(k) retirement plan at work offers loans, you might consider borrowing from your 401(k) account for education costs. But be careful that you don’t jeopardize your own retirement funding.

We Can Help

We can provide you with the information you need on the tax benefits available to you in your college financing. Moreover, we can help you develop a plan for meeting your education savings goals, no matter whether you have 18 years or 18 months to plan. Contact us soon.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.