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Saving for College

As an Alumni Interviewer for Georgetown University for more than 30 years, I have seen the cost of private and public education skyrocket beyond inflation, investment returns and increases in income. My entire education, BSFS, JD, LL.M.(Tax), studying in Europe, living expenses and my car cost less than $40,000 in the early 1970's. Today, one year at Georgetown and other highly selective urban schools exceeds $50,000. The trend is rapidly increasing costs and large burdens on the families of students.

Students Entering College.
It is too late to save but not too late to consider cost-saving choices. Is your son or daughter going to a highly selective or very specialized school? If not, have you considered a county college for two years. The education may not be a the level of some more elite schools, but many states require state-supported universities to accept credit transfers from county college students. This can be a huge savings.

Students Age 10 to 13
Time is running out for savings. 529 plans will have limited value whether the plan is a savings or price stabilizing program. Any tax deferred savings program will help some. Other choices are to have grandparents, and other friends and relatives help contribute to a 529 plan. This can quickly build up some funds.

Birth through 10
This is the time to start saving even though it may be very hard. Select a 529 plan and start contributing. Encourage grandparents to set-up an education trust and to contribute up to $12k (per grandparent, per child) yearly. Even if their means only allow a $2k contribution per year, this is still a help.

This is also the time to invest rather than merely save. You need assets that will grow in value to match inflation. Real estate, stock, and annuity/insurance programs may help.

Education Credits

The Hope credit and the lifetime learning credit help parents and students pay for post-secondary education. Normally, you can claim tuition and required enrollment fees paid for your own, as well as your dependents’ college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time. You can take the lifetime learning credit, even if you’re only taking one course.

The Hope Credit

  • Applies for the first two years of post-secondary education, such as college or vocational school. It does not apply to the third, fourth, or higher years of undergraduate programs, to graduate programs, or to professional-level programs.
  • It can be worth up to $1,650 per eligible student, per year.
  • You're allowed a credit of 100% of the first $1,100 of qualified tuition and related fees paid during the tax year, plus 50% of the next $1,100.
  • Each student must be enrolled at least half-time for at least one academic period which began during the year.
  • The student must be free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.

The Lifetime Learning Credit

  • Applies to undergraduate, graduate and professional degree courses, including instruction to acquire or improve job skills, regardless of the number of years in the program.
  • If you qualify, your credit equals 20% of the first $10,000 of post-secondary tuition and fees you pay during the year, for a maximum credit of $2,000 per tax return.

In some cases, you may do better by claiming the tuition and fees deduction, instead of the Hope Credit.

You cannot take both an education credit and the tuition and fees deduction for the same student in the same year. Special rules, including income limits, apply to each of these tax breaks.

These tax credits are claimed on IRS Form 8863

Grandparents: How can you help fund the education for your grandchildren?

New College Aid Bill - Caps Interest Rates and may lessen loan availability - A new federal law designed to make student loans more affordable could also have a negative impact as some lenders begin to increase the costs involved in issuing the loans. Click here for the full article...