|Strategies for Funding
Even if you invest
wisely and defer the tax liability on savings for your child's
college fund, you'll have to come up with the taxes when you
liquidate those investments. Chances are you'll be faced with
taxes at a time in the future when you are likely to be in a
higher tax bracket and have other additional expenses. You'll
need to be sure your investments earn enough to cover the
It's important to note, too, that tax laws are
constantly changing. Consult your tax advisor before you begin
investing, then check back regularly. If tax law changes
negatively affect your college investments, you may want to move
the money. How and when you move the funds also can affect
taxes, so be sure to talk to your tax advisor first.
Here are just a few examples of tax
considerations affecting college funds:
If you plan to take out a loan to help pay for your child's
college expenses, the interest may now be deductible.
Generally, if the taxpayer's adjusted gross income is below
$60,000 for joint filers and below $40,000 for single filers
the following interest may be deductible. The deduction is
phased out ratably from $40,000 to $55,000 for single filers
and from $60,000 to $75,000 for joint filers.
Year Offest Tax On
|2001 and beyond
A deduction may be claimed only on interest
paid during the first 60 months in which interest is owed.
Students may claim this deduction only if they are not claimed
as dependents on parent's returns.
- UGMA accounts.
You can put assets in a Uniform Gift to Minors Act (UGMA)
custodial account for a child. However, if the child is under
age 14, all income earned by these assets above a certain
level (determined annually by the IRS) is taxed at the
parents' income rate, whether or not the parent is the
custodian. For children 14 years old and older, the income on
assets in a UGMA account is generally taxed at the child's
rate. You should keep in mind that
putting assets in your child's name may reduce the amount of
financial aid he or she is eligible to receive.
Other Avenues for Revenue
Even if you start early, it may be impossible
to save enough for your child's college education. That doesn't
mean, however, that college is out of the question. You have
other cost-saving options available.
While they may not be options you should rely on,
there are some strategies students can follow to help reduce
their expenses prior to entering college and once they're in
college. For example, many college students, particularly those
who commute to a local school, are able to work part-time and
summer jobs to help subsidize their tuition or simply to earn
spending money. Be aware, however, that money earned by the
child prior to college may reduce his or her eligibility for
financial aid. Some colleges offer cooperative education
programs where students rotate study with periods of
career-related work, allowing them to earn money and credits at
the same time. However, it may take more than four years to
complete a degree through a cooperative education program. Ask
the college admissions office about the specifics of their
Depending on a child's scholastic ability, he
or she may be able to earn college credits by taking college
courses or advance placement exams while still in high school.
First- and second-year college students can also take College
Level Examination Program tests for course credit. These options
can represent a significant savings over the cost of a
full-semester course in the classroom. Check with your child's
high school guidance counselor or with the college admissions
office for eligibility requirements and program specifics.
Another cost-savings possibility is to attend
a community college for the first year or two, then transfer to
a four-year college to complete a degree. This can be a more
affordable approach to receiving a degree from a prestigious
institution that you may have been unable to afford for four
years or which may have been more competitive to gain entrance
as a freshman.
Think of this in broad terms. You needn't be the
sole source of funding for your child's higher education. For
example, when your child receives a gift of money, put it into a
college fund. When grandparents ask what to give for birthdays,
suggest college fund contributions.
And don't forget the traditional sources of
financial aid: scholarships, grants, work-study programs and
government loans. Your child's scholastic record, course of
study, athletic ability and choice of college are just a few of
the variables that may affect the availability of these options.
If your family meets certain financial
criteria, the federal government has a program of low-interest
loans with extended payment terms. Relying too heavily on loans,
however, is costly and can burden graduates with large debts
just when they are working to establish their financial
independence. Also, you should be aware that government
financial aid programs are subject to change.
Here is one
for combining student loans.
If you bought your home when your child was small, you're likely
to have built up a significant amount of equity by the time
college is in the picture. You can tap that resource for your
child's education with a home-equity line of credit. Interest
payments may be tax deductible.