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2006: A look back - A look ahead  
  Change was the name of the game in 2006 while the biggest push for reform in 2007 will be aimed at college-related debt.
 College financing
 Personal finance calendar  Personal finance calendar 

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.

First, families lost a potentially valuable credit for higher education expenses. The "above the line" tuition-and-fees 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.

-- Posted: Nov. 1, 2006
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