Tips on How to Pay for College
Learn how to save money when paying for education.
I’ll tell you more in a moment, but first, I got a great e-mail from William, who said:
It’s almost that time of year when college students stock up on Ramen noodles, tighten their belts, and grit their teeth for a year of devoted study. It’s also time to start figuring out ways to fund this horrible trauma. Because I chose the highly appreciated and well-paid career of high-school science teacher, I won't be able to pay off my loans as quickly as other professionals. What kinds of loans, loan-forgiveness, student aid, tax credits, or other pots of gold do you have up your sleeve?
Thanks William! Whether you’re a young college student or an experienced professional who’s decided to head back to school, getting accepted into a great program is just half the battle--the other half is figuring out how to pay for it!
Tip #1 Use Gifts & Employer Tuition Reimbursement
So let’s start with the most obvious way to reduce the cost of education--have someone else pay for it! If you have family or an employer who’s willing to pay for all or a portion of your tuition, consider yourself extremely fortunate. If you do plan to stay employed while you go back to school (like I did when I went for my MBA), approach your employer about your eligibility for tuition reimbursement.
Tip #2 Save to a 529 Plan
If you or a family member are going to fund all or a portion of your tuition, tip number two is to save the money in a 529 plan. A 529 is a tax-favored account that’s become the most popular way to save for higher education. Just make sure that the school you’ll attend is eligible to accept 529 funds. Anyone can contribute to and benefit from a 529; there are no income or age restrictions placed on 529 contributors or students who use the funds. Plus there’s no annual limit to how much you can contribute. Funds in a 529 are taxed only if withdrawals from the account exceed the total amount of your education expenses. Qualified expenses include tuition, fees, books, supplies, and equipment required for coursework. For 2009 and 2010 the cost of computer equipment, technology, and Internet access are also included when used by the student who’s the beneficiary of 529 plan funds. For more info listen to show number 108 which covered 529s in more detail. I’ll include a link on the blog at moneygirl.quickanddirtytips.com to a handy 529 plan comparison tool as well as to a lookup tool for 529 eligible schools.
Tip #3 Get Federal Student Financial Aid
Tip number three is to apply for federal student financial aid. That might come in the form of a loan, grant, fellowship, or work-study program. You need to apply for financial aid before staring school or while you’re a current student. As William mentioned in his e-mail, there are some circumstances in which you can get help paying off existing loans in the form of loan forgiveness. That’s when the government cancels or pays off all or a part of student debt in exchange for volunteer work, military service, government work, legal work, teaching, or providing health services in certain communities, for example. In some cases a forgiven loan is even excluded from your taxable income. There are hundreds of programs available, so I’ll refer you to the loan forgiveness section at finaid.org, which is an award-winning website packed full of information and tools related to student financial aid.
Even if you think you earn too much to qualify for student aid, I recommend that you submit an application anyway. You may find that you have more options than you thought. Submit the government’s online Free Application for Federal Student Aid at fafsa.ed.gov. You can apply in advance, before you’re officially accepted into a school’s program.
Tip #4 Get School Aid
If you don’t qualify for federal student aid, tip number four is to ask your school if they offer any type of financial assistance. Quickly contact your institution’s director of financial aid, because those opportunities usually get distributed on a first-come first-served basis.
Tip #5 Get Low-Cost Private Funding
If you can’t get any type of aid or you need to borrow an additional amount to foot your education bill, tip number five is to consider low-cost private funding. There’s a growing online network at TuitionU.com that introduces students to a community of unique and low-cost financing alternatives such as peer-to-peer lending, not-for-profit credit unions, sponsors, charitable donors, as well as traditional lenders.
Tip #6 Claim the American Opportunity Tax Credit
Now, back to saving money on the cost of tuition. Tip number six is to lower your taxes by taking a new education benefit called the American Opportunity Tax Credit. It modifies what used to be called the Hope Credit, making it available to more taxpayers. The income limits to qualify have been increased to $90,000 for singles and $180,000 for those who file taxes jointly. The credit pays up to $2,500 for tuition and related expenses such as books, supplies, and equipment that you purchase in 2009 and in 2010. The American Opportunity Tax Credit is also partially refundable, which means that even if you don’t owe any tax, you can still get a portion of your eligible credit as a tax refund. You claim it by submitting IRS Form 8863 with your tax return.
Tip #7 Take the Tuition and Fees Tax Deduction
Tip number seven is to take the tuition and fees deduction, which can reduce your taxable income by as much as $4,000. This deduction is for the cost of enrollment and course-related books, supplies, and equipment. You can take it even if you don’t itemize deductions on your tax return, however, there are income limits for eligibility--$80,000 for singles and $160,000 for married couples filing jointly. You claim the tuition and fees deduction by submitting IRS Form 8917. But please note that you can’t take this deduction if you also claim an education tax credit in the same year. You must choose to take either the deduction or the credit for education expenses--the IRS doesn’t allow you to double-up on tax benefits. Tax credits usually offer more tax savings than tax deductions. Calculate your taxes both ways and then choose the option that lowers your taxes the most.
Tip #8 Take the Student Loan Interest Tax Deduction
And my final tip, number eight, applies once you start paying off a student loan. There’s a tax deduction you’re permitted to take for the interest you pay on your student loans each year--yes, it’s called the student loan interest tax deduction. It can reduce your taxable income by as much as $2,500. You’re eligible to claim the deduction if your adjusted income doesn’t exceed $70,000 or $145,000 if you’re married and file a joint tax return. You can take the student loan interest deduction even if you don’t itemize deductions on your return. To claim it, just enter the allowable amount on your tax return—there isn’t a separate form that you have to submit. Find a worksheet in the IRS Form 1040 or Form 1040A to help you figure the deduction.
William, I hope those are enough pots of gold to get you thinking about all the many ways to make the cost of getting a good education more affordable! If not, you can always try to get the most out of your textbook buy-backs with this Quick Tip of mine.
And I have an entire episode devoted to financial tips for new graduates, so please be sure to check it out.
If you have a money question, e-mail it to me at firstname.lastname@example.org.
I’m glad you’re listening. Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.
IRS Publication 970 – Tax Benefits for Education
Consolidating Student Loans – Money Girl Podcast 124
Image courtesy of Shutterstock