College Planning & Financial Aid

Some colleges are using billing agencies to administer monthly payment plans for tuition, room and board and books. Generally, you pay a nominal yearly fee ($25-$75) and then monthly payments prorated for projected, annual expenses. This plan is available for parents that can meet monthly cash flow payments, but do not have sufficient education savings. Check with the college's Accounting Office to determine if this type of plan is offered.

Some colleges now offer prepaid tuition plans. Generally, you agree to pay a lump sum amount today and, in exchange, the college will guarantee your child four years of already prepaid education. Earnings on the plan's investments are tax-deferred. When the plan pays the tuition benefit, the difference between the purchase price and the benefit will be taxed. If the funds are used for qualified higher education expenses, the investment earnings will be included as part of the beneficiary's income, therefore the earnings will be taxed at the student's usually lower tax rate rather than the purchaser's usually higher tax rate.

One strategy is where the grandparents can help the grandchildren's education by making a gift under the Uniform Gifts to Minors Act. Each grandparent can give up to $13,000 per child annually free of gift tax, which should be placed in a UGMA bank account in the grandchild's name, with the grandparent or parent as custodian. Another strategy is for the grandparents to purchase Series EE or Series I bonds, or give the money to the grandchild's parent (who must be at least age 24) to buy the bonds. If the bonds are later cashed and the money used to pay qualified college education costs for the grandchild, the interest will not be taxed. The exclusion is phased out for high income taxpayers. Maximum annual purchases of Series I or Series EE are $30,000. Series I bonds also include the feature of being indexed to inflation. Speak to your local CPA about these tax saving strategies.

The four branches of the US military operate their own service academies. They are all four-year institutions. Competition to get into these schools is highly competitive. Students become commissioned officers immediately upon graduation. Those who are accepted get full scholarships and a small monthly allowance. For more information, speak to your HS guidance counselor or contact: The Coast Guard Academy in Connecticut at 800-883-8372, The U.S. Military Academy at West Point, N.Y. at 800-822-8762, The Naval Academy in Maryland at 800-638-9156, The Air Force Academy in Colorado at 800-443-9266.

A useful way of funding college costs is to set up an IRS Section 2503(b) trust. This trust works well with large sums of money. Parents can contribute up to $13,000 per year per child to this kind of trust and still qualify for the annual gift tax exclusion. Funds within the trust can be accumulated and principal payments delayed until college. A 2503b)trust requires that all income be paid annually or more frequently to the beneficiaries. Principal payments can be delayed until age 21. Income distributions can be planned by various investment strategies. Principal can often be left in trust for periods of time exceeding the child's 21st birthday. Speak to your local CPA about this college funding tax strategy.

The American Opportunity Tax Credit modifies the existing Hope Credit for tax years 2009 and 2010 under ARRA. The credit was extended to apply for tax years 2011 and 2012 by the Tax Relief and Job Creation Act of 2010. The new credit makes the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.

The lifetime learning credit helps parents and students pay for post-secondary education. For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree. Generally, you can claim the lifetime learning credit if all three of the following requirements are met: You pay qualified education expenses of higher education. You pay the education expenses for an eligible student. The eligible student is yourself, your spouse or a dependent for which you claim an exemption on your tax return. If you’re eligible to claim the lifetime learning credit and are also eligible to claim the Hope or American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope or American opportunity credit for one student and the lifetime learning credit for another student in the same year.

The Reserve Officers' Training Corps. (ROTC) provides students with money for college. Generally, the arrangement is, in exchange for the college education, the student must make a commitment to join the armed services after graduation. After graduation, students become commissioned officers in the Marine Corps, Army, Navy or Air Force. ROTC scholarships pay for tuition, fees and books for all four years of college. Lesser programs are available for students who want to make lesser commitments.

The expected family contribution is a key factor that determines whether your child can receive college financial aid based on your expected family contribution. Your expected family contribution is calculated according to a formula set by Congress. It takes into account the family's income, savings and other factors. Generally parents are expected to contribute about 6 % of their savings to pay for their child's education. The child presumably has fewer overall expenses. About 35 % of their savings will be expected to be used to meet college costs. Your expected family contribution will then be compared to the cost of attending the college your child has selected to determine whether they are eligible for financial aid. Some parents feel this calculation is not realistic and is an inflated amount.