Is college a year or more away? Here are some options for planning your college financing strategy.
Don't wait to see financial aid award letters before you start planning how to pay your share of college expenses.
Popular College Saving Options
Setting aside money for college is always a good idea. These plans are commonly used for college saving.
- 529 College Savings Plans. Annual investment limits are generous for 529 plans, allowing for substantial college savings. Plus, 529 accounts owned by parents are tax-free and have a low impact on financial aid calculations. Each state has different rules, fees, and limitations for these accounts, so shop around.
- Prepaid Tuition Plans. A 529 prepaid tuition plan is a tax-free savings account that allows contributors to pre-pay for tuition. These plans are usually for public schools and in-state colleges. A private college plan is also available for over 270 private colleges.
- Individual Retirement Accounts. Traditional and Roth IRAs are another choice for college savings, provided your own retirement savings are on track.
Learn more: How Student and Parent Income Affect Your Financial Aid
Popular College Tax Savings Options
If you pay Uncle Sam less, then you'll have more money available to pay for college. Consider whether you can take advantage of these education tax breaks.
Avoid holding assets in the student's name
Except for 529 savings accounts, money held in the student's name counts much higher in aid calculations than parent-owned accounts.
- You qualify for the American Opportunity credit if you pay college expenses for an undergraduate student during the first four years of college. The student must attend college full time.
- You can claim the Lifetime Learning credit if you pay college expenses for an undergraduate, graduate, or professional student, even if the student attends college less than half-time.
- The student loan interest deduction reduces taxable income based on qualified tuition and fees paid with a student loan during the tax year.
Learn more: Tax Breaks for College
Popular College Borrowing Options
Loans are part of most college financing plans. Bear in mind that loans make it easier to pay for college, but they don't reduce college cost since they have to be repaid. Research these borrowing options well before college starts, so you'll have some idea of how much interest rates will be, and how much in loan payments you can afford.
- Subsidized student loans. Based on family income, some students qualify for federal subsidized loans and state-supported, low-interest loans. Payments are deferred until graduation with no interest accumulation.
- Other student loans. Other loans to consider include federal unsubsidized loans, federal PLUS loans, and college-based loans.
- Home equity loans and other personal borrowing. For some families, home equity lines of credit or loans from banks or other private lenders may offer the best rates and terms.
Learn more: Borrowing Options for College
Take Time to Find Affordable Schools
It's true that almost all students get some kind of aid from their college. But carefully planning where to apply will position the student to get the best aid. Look for colleges with a history of offering cost-reducing grants and scholarships, and where the student's GPA and test scores put them at the top of the freshman class.
Learn more: Finding Financially Friendly Colleges
Putting the College Financing Pieces Together
These savings methods and vehicles have been used successfully by many families, but it's a good idea to seek the advice of an experienced college financial advisor to help you choose the optimal college financing plan.