College Financing Basics
college
Education bond programs

The good news is that those numbers are adjusted annually, so the ceilings may be much higher when you redeem your bonds.

Keep in mind that your adjusted gross income for the year you redeem your bonds includes all the interest earned on the bonds you cashed in. Ironically, this may actually push some families past the cut-offs, reducing or even eliminating their exclusion.

Age

You must be at least 24 years old to buy the bonds. In other words, you can't have a child and then buy the bonds in the child's name to circumvent the income limitations listed above. You can use them yourself if you wish, but you still must be at least 24 when you purchase them.

Qualifications

You can use the expenses for tuition and fees, but not for room and board or books. Qualified expenses must also take into account any scholarships, fellowships or other forms of tuition reduction and you must incur the expenses the same year you redeem the bonds.

If you redeem more cash in bonds than you use for educational expenses, the interest you earn will be taxed on a pro-rated basis.

For example, if you have a $10,000 bond consisting of $8,000 principal and $2000 interest, and have $6,000 in expenses, you could exclude 60 percent of the earned interest, or $1,200. The other $800 would be subject to taxes.

Long-term plans

Cash in the bonds within five years of purchase and you'll have to forfeit three months' worth of interest, so make sure you won't need to pull out the money for an emergency.

Custodial Accounts

If your family expects to pay for your college education or if your income is too high to receive any financial aid, you may want to consider a custodial account. Also known as Uniform Transfer to Minors Act (UTMA) accounts or Uniform Gifts to Minors Act (UGMA) accounts, they offer maximum flexibility and up to $750 a year in tax-free earnings.

There's a significant drawback, however: Even though the parent is the custodian of the account, UTMAs and UGMAs are considered income-producing assets of the minor and therefore can significantly impact any aid you might apply for later on. Plus, your child will take over the account at age 18 and because there's no requirement that the money be used for educational purposes the child can spend the money on anything.

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