The smart way to spend your college fund |
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A year's worth of prepaid tuition is guaranteed to
pay for a year's worth of classes at any state college or university.
You might as well use a year's worth of prepaid tuition
for a student's first year of college. Doing so will improve a student's
chances of receiving financial aid later on. The longer you hold
on to the money in a prepaid tuition plan the more it will hinder
a student's ability to qualify for financial aid.
"If we're talking about aid, it's the worst because it's a
dollar-per-dollar reduction in aid," says Vickie Hampton, a
certified financial planner and associate professor at Texas Tech
University in Lubbock.
"What it's really going to affect is the grants and work-study
programs because those things are the primary needs-based programs."
You may be able to transfer the money in a prepaid tuition plan
to the prepaid tuition plan of another family member. Be sure to
check with your state's plan for details.
Finally, the 529 plan money
Money stashed in a state-sponsored 529 college savings plan also
affects financial aid but not as severely. A family with a 529 plan
will see their eligibility for aid decrease by as much as 5.6 percent
of the account's value.
Because of this, some financial planners advise parents to hold
off on tapping a 529 plan for as long as possible. Doing so will
give the money in a 529 plan more time to grow tax-free.
"If you qualify for financial aid, I would delay withdrawing
from a 529 plan until after you've filled out your final financial
aid form," says Rick Darvis, president of College Funding Inc.
A college student would file their final financial aid form in
January of their junior year. After the form is filed, you could
use the money in the 529 plan to pay for a student's final 1 1/2
years of college. Any leftover money could be rolled into a 529
plan for another family member.
"You can roll it over to a younger sibling, so that does give
you some flexibility," Darvis says.
Making the most of tax credits
Educational expenses: Tax breaks
allow you to deduct the amount of regular education expenses (tuition,
books and fees) up to $4,000. This can easily be claimed using form
1040 and 1040A but is limited by your income: A single filer must
make less than $65,000 yearly and married couples must earn less
than $130,000.
If your income exceeds that limit you can still claim up to $2,000
for tuition and fees, provided that your income is still under $80,000
as a single filer ($160,000 if you're married and file jointly).
Tax Credits: Two popular tax credits
-- the Hope Credit and the Lifetime Learning Credit -- can help
defray education expenses for your family. A credit, which is subtracted
directly from the final tax you owe, can take a big bite out of
your tax bill.
If you're footing the bill for your child's college education,
a Hope Credit may be for you. It applies for the first two years
of post-secondary education -- such as college or vocational school
-- and it can be worth up to $1,500 per student, per year. Graduate
and professional-level programs are not eligible.
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