Tips for Parents: Saving, Paying and Borrowing for Your Child's College Education
Determine the Expected Family Contribution (EFC) Toward College Costs
As a
parent, how much you are expected to contribute toward your child’s college
education is determined by the federal government based on information you
provide in the Free Application for Federal Student Aid (FAFSA). In the
application process, you are asked to provide information regarding your and
your child’s finances, including income and assets. You are also asked how many
dependents you have and how many family members will be attending college at the
same time. This information is analyzed to determine what you can contribute
toward your child’s educational expenses, which is called the Expected Family
Contribution, or EFC. The lower your EFC, the more grants and loans your child
will be qualified to receive.
Prepare for College Costs by Pre-Paying Tuition
A number of colleges and
universities participate in pre-paid tuition programs for future students. This
is quite an advantage to parents who can invest money now and lock in the
tuition rate for their children well in advance of when the children will be
ready to attend. Some pre-paid tuition plans are managed at the state level, so
you need to explore the options available to determine which is best for you.
There is also the possibility that this financial move could provide a tax
benefit to you, so you may want to ask a tax adviser for more information.
Save for College
While many parents don’t heed this advice, the best way
to prepare for college is to start saving money when your child is born. Since
the cost of a college education increases each year, investing in a special
college savings plan can help you stay ahead of the game. There are special
educational plans that provide a tax shelter for your funds until your little
pride and joy goes away to college. Many states offer college savings
opportunities, such as a Section 529 Education Savings Plan, that allow you to
begin investing early. You can also start saving in your child’s name through
the Coverdell Education Savings Account. This plan allows funds to be added
until your child turns 18 and also provides tax benefits. To see which option is
best for your family, talk to a tax adviser about the benefits and start saving,
no matter how old your child is.
Use a PLUS Loan to Pay For College
Depending on your financial situation,
your child may or may not qualify for federal funds to help defray the costs of
attending college. Often, these funds may not be enough. Many parents look for
additional funding sources through loans such as the Parent Loan for
Undergraduate Students (PLUS). Your child’s college may participate in either a
program where the funds are disbursed directly through the U.S. Department of
Education or through the Federal Family Education Loan Program (FFELP), in which
the loan is completed through a private lender that you need to contact
directly. You will be asked to fill out an application and your credit history
will be reviewed for any adverse activity (default on previous debt). If you
don't meet the minimum criteria, you may need a co-signer for the loan. If you
are denied a PLUS loan, your child may qualify for additional federal (Stafford)
loan funds.
Know The Tax Benefits of College
The advantages of a higher education can
include a credit on your annual federal tax return. There are actually two
credits available, but you can take only one each year. With the Hope
Scholarship, you may be eligible to take a credit to cover tuition and fees up
to $1,650 per eligible dependent child. The student must be enrolled on at least
a part-time basis, and the credit can be taken only for two years. Another
possible option is the Lifetime Learning Credit. This provides a maximum credit
of $2,000, or up to 20 percent of tuition and fees. How many hours a student is
enrolled does not matter, and it can be used for all family members enrolled in
college. Both of these tax credits are subject to income guidelines outlined by
the Internal Revenue Service. You should check with a tax adviser to see if you
qualify for either one.
Use Your Home Equity for College Expenses
Don’t forget about the equity
you have accumulated in your home over the years. You may actually find
acquiring a home equity loan is a better option for you than accumulating
student loan debt, because your home equity loan may qualify you for additional
tax benefits.
Watch Out for Loan Scams
Navigating the financial aid process can seem
daunting the first time you have to go through it. When an advertisement comes
in the mail or a salesperson calls offering to do all the work for you, you may
be tempted. Some ads even promise that your child will qualify for financial aid
regardless of your credit history. What they all have in common, though, is that
they want you to pay a fee for this service. Don’t let yourself be taken in by
these offers. Applying for federal financial aid is free and qualifying for aid
really depends on your financial situation. Some of these student loan scams
take advantage of the uninformed and could end up destroying you or your child’s
credit history. In addition, the student loans they offer you could leave you
even further in debt. Do your research carefully!
