Pay for college without breaking the bank

Pay for college without breaking the bank

When your paycheck stops in retirement, will you have enough to pay your bills, travel, and live the lifestyle you want in your golden years? Of course, you may be one of the lucky ones with a pension. Social Security may even still exist. But if you want to live out your retirement vision, saving and investing properly are important. And how you pay for college for your kids will affect your own retirement. Consider this: College tuition, books, fees, and housing continue to increase at a rate faster than overall inflation. Based on current trends, the cost of sending just two children to a private or elite college for a total of eight years would cost more than $360,000 after taxes. That means those in the 28 percent tax bracket would need to earn more than $500,000 to cover cash flow expenses. Regardless of where you send your kids to school, the bottom line is this: How you pay for college affects how much you save for retirement. Because every dollar you save on college costs means more for your personal retirement down the road.

There are a number of strategies you can use to improve your chances of a better retirement and a solid education at lower personal costs. There are more than thirteen strategies for increasing needs-based aid. There are at least a dozen ways to cut costs that any family can use to improve their bottom line. Ultimately, it comes down to how well you know how to use the IRS code to your advantage to lower your own Expected Family Contribution (or EFC in financial aid parlance). Whether you expect to qualify for need-based aid or not, here are some examples of cost-cutting strategies available to you.

Strategy 1: Earn college credit by taking exams By taking advanced placement exams or even a “challenge” exam for core college courses, a student can move through school more quickly, potentially saving thousands in tuition and fees. Advanced Placement (AP), College-Level Examination Program (CLEP), or DSST exam opportunities are available for 37 different courses. For more information about these, see CollegeBoard or search for “Get College Credit.”

Strategy 2: Stay local In-state tuition and fees at an in-state institution of higher education are a bargain compared to elite and even crossing the border to go to a state college in another state. If you are considering going across the border or going, consider having your child establish residency in this country. Find out what the residency requirements are ahead of time by contacting the Admissions Office.

Strategy 3: Get the credit you deserve from the IRS Use the Hope Education Credit, renamed the American Opportunity Tax Credit. This was recently increased to $2,500 (from $1,200) and now applies to all four years of college, not just the first two. In addition, forty percent of the loan is now being repaid. Other help comes in the form of the Lifetime Learning Credit, which is available to one family member and allows you to take up to a 40% credit for educational expenses up to $10,000. Income limits apply, so be sure to check with a qualified tax professional or visit the IRS website.

Strategy 4: Hire your child If you own a business, work as an independent contractor, or own rental real estate, consider hiring your child to work for you. Perhaps your child can provide administrative support or help with marketing or real estate chores. By employing and paying a child, you will reduce your personal taxable income by deducting business expenses and provide income for your child. In addition, the child can use the proceeds to open a Roth IRA, a tax-advantaged retirement account that does not count as an asset for financial aid purposes. And if needed, the child can withdraw a portion of the earnings to pay for qualified educational expenses. There are certain limits and time limits that apply.

Strategy 5: Create a Section 127 Education Assistance Plan As a business owner, you can set up an employer-paid Section 127 training benefit program for your employees. This plan allows the business owner to pay up to $5,250 per year to employees (including employed children) as a qualified tax-deductible expense. This can be used for both undergraduate and graduate study programs. Assuming that Junior would have worked in the family business during the summer and throughout the year, Junior could be earning a salary (a deductible business expense) that he could use for his own maintenance and a Roth IRA contribution (which could match on payment terms educational expenses) and earn a tuition allowance (another deductible business expense). If you do intend to give the money to the child, you can also structure it to be tax-deductible. Think about it: There are more than 110 different other strategies to consider. All the more reason to have a coordinated plan by speaking with a professional advisor who can help evaluate these options with you. Food for thought:

  • Encourage your pre-teen to open a Roth IRA with earnings from their paper trail or other jobs.
  • Consider hiring your child to work in your business or help you with duties related to your investment property.
  • Use a CollegeSure CD issued by an FDIC-insured bank to build savings
  • Consider using a fixed income annuity to hold some money for college to avoid the potential loss of principal that can happen with a 529 plan invested in mutual funds.
  • Pursue private and merit-based scholarships (For more information on some of these options, see Fast Web, CollegBoard, and Scholarship Experts or Scholarship Coach on the web.

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