|College financing in 2006: A year of change
Sounds reasonable, right? Until this past summer, prepaid plans had one big drawback. They could end up socking it to you when it comes to financial aid since every dollar salted away in a prepaid plan was counted against a student in terms of financial aid. If you paid for $12,000 worth of tuition in a prepaid plan, you'd lose that much in potential financial aid awards.
But the Deficit
Reduction Act, passed in early
2006, rendered prepaid plans
equal to other 529 savings plans
as far as their treatment for
financial aid purposes. In other
words, they're considered to
be a parental asset rather than
a student asset. Here's the
bottom line: Just 5.6 percent
of assets are counted in the
financial aid formula that determines
a family's expected contribution.
That means students can qualify
for more scholarships, grants
or other forms of assistance.
"For prepaid program account owners, to have them treated as any other asset a parent might own is tremendous," says Chris Hunter, program manager of College Savings Plan Network. "We've been working with Congress and the National Association of State Treasurers for the better part of the decade to get this improvement made."
Tax changes that pinch
When it comes to tax filing time, news was dim for college savers.
lost a potentially valuable
credit for higher education
expenses. The "above the
deduction for college costs,
worth up to $4,000, expired
at the start of 2006 and has
not yet been restored.
"It was tied up with estate-tax reform and minimum wage increases," explains Mark Luscombe, principal tax analyst at CCH, the tax law publisher.
"Congress is still working on legislation to retroactively renew the deduction to the beginning of 2006, but if it gets to the point that people start filing their taxes for the year, that may not happen."
The second hit
-- the extension of the so-called
"kiddie tax" -- affects
families who've traditionally
sheltered investments earmarked
for college by giving those
assets to their children. Kids
up to age 18 now face up to
three times as much in taxes
on investment income that exceeds
$1,700. That's because they
must pay their parents' tax
rate -- in some cases as much
as 35 percent. Prior to Jan.
1, the kiddie tax only affected
children up to age 14, but the
new law extends it to those
up to age 18 -- or matriculation
age for college students.
Like other changes, both good and bad, it will push families to rethink how they save and pay for college.