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Homeownership
College
Insurance
Marriage
Parenthood
Entrepreneurship
Retirement
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IMPLEMENT A SAVINGS BLITZ
Depending on how much time you have before
enrollment, redoubling your efforts may enable you to close
all or part of the gap between your resources and tuition
bills. And by continuing to tighten your belt during college
years, you may be able to foot at least some of the bill
through current income. In addition, some schools offer
tuition management services that, for a fee of about $50,
allow you to spread the school’s annual tuition into eight
or 10 monthly payments.
In addition, state-sponsored savings plans—such as the 529
savings plan—offer significant tax breaks and other
advantages. While contributions to a 529 plan are not
federally tax deductible, the earnings grow tax-free.
Distributions from a 529 plan are also tax-free (through the
year 2010 at least), as long as the money is used to pay for
higher education expenses.
Most plans allow you to invest a lump sum, deposit funds
periodically or sign up for an automatic investment program
that deducts a specified amount from your bank account on a
monthly basis.
Generally there are no income limitations for opening a
Section 529 plan. Everyone is eligible to participate and
the amount you can contribute is substantial. Since most
states don’t have an annual cap, it’s possible to contribute
$11,000 each year without triggering any gift taxes.
APPEAL FOR ADDITIONAL FINANCIAL AID
There are three major types of financial aid: scholarships
or grants that do not have to be repaid; student or parent
loans that must be repaid (usually after graduation); and
work-study arrangements.
Financial aid is based primarily on two factors: the
school’s cost of attendance—which includes tuition and fees,
room and board, personal expenses, books and
transportation—and your family’s ability to pay. That means
if two families have exactly the same financial
circumstances (and that is highly unlikely), one student
could receive financial aid, and the other not, simply
because one school costs more.
When you apply, the financial information you provide is
keyed into a federal formula that takes into account your
family income, assets, family size, number of children in
college and other factors. It also calculates the amount you
and your family are expected to contribute toward the
education cost. If this amount is less than the total cost
of attendance, you’ve demonstrated need and are eligible for
aid.
If your family has special financial circumstances, such as
high medical bills or loss of employment, that are not
apparent in the numbers you submit, you should send letters
of explanation to the financial aid offices of the colleges
to which you apply.
SEEK OUT SCHOLARSHIPS
You don’t have to be a straight A student or a star athlete
to qualify for a scholarship. Many are available to students
with special interests or skills. For example, scholarships
are available for Swedish Americans who play the oboe and
camp counselors who plan to study special education. Of
course, these scholarships aren’t always easy to find. The
Internet is a good place to start or the department office
for your major.
TURN TO GOVERNMENT LOANS
Although some parents are reluctant to take on additional
debt, federal student loan programs can be a relatively
inexpensive source of education funds. Federally funded
Parent Loan for Undergraduate Students (PLUS) allows
creditworthy parents of college students to borrow up to the
full amount of tuition. The interest rates on PLUS loans are
variable with a 9 percent cap and you must begin repayment
60 days after the funds are disbursed.
Stafford loans are available to students at varying levels.
A freshman can borrow $2,625; the maximum loan amount
increases to $5,000 by the time you are a junior. In most
cases, repayment begins six months after graduation.
TAP YOUR HOME EQUITY
With mortgage rates at historic lows, a cash-out refinancing
or home equity loan are attractive alternatives that offer a
lump sum payment you can use to meet college costs. This
strategy works particularly well for families who have
insufficient cash flow, but a good deal of equity in their
homes. As an added benefit, the interest you pay may be tax
deductible. However, borrowing against a home is a decision
not to be taken lightly—failure to meet payments could put
your family’s home at risk.
FOCUS
ON LESS EXPENSIVE SCHOOLS
Comparison shop when looking at schools. In some instances,
location may cause a school to be more reasonably priced
than another school. Also, public state colleges are less
expensive than private schools, particularly when the
student qualifies for resident tuition rates. Attending an
in-state school also can defray travel expenses and
long-distance phone bills. Another popular option is to
attend a community college for the first year or two and
then transfer to a brand-name four-year school.
THERE’S NO SUCH THING AS A RETIREMENT LOAN
A word of caution from CPAs: do not use retirement savings
to pay college tuition. More resources are available for
funding an education than for financing a retirement. In
addition to the tax implications of withdrawing from
retirement savings, you’re giving up valuable earnings.
Brought to you by the North Carolina
Association of Certified Public Accountants in cooperation with the AICPA.
©2007 The American Institute of Certified Public Accountants;
www.360financialliteracy.org
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