Parent’s Finance Guide to a Child’s Education

Tips on Saving, Paying, and Borrowing

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. Their decision is 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 both your finances and your child’s, 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.

Use our EFC calculator to estimate your expected contribution, and get planning!

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. Check with the college directly 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 by protecting you against inflation. There are special educational plans that provide a tax shelter for your funds until your future scholar runs off 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
Your child will qualify for federal funds to pay for college; whether the loans are subsidized or unsubsidized depends on your financial situation. If you have demonstrated need, your child may qualify for subsidized federal loans or grant money (which doesn’t need to be paid back) to help defray the costs of attending college. If your child does not qualify for subsidized loans based on need, they will qualify for unsubsidized loans. However, these funds may not be enough. Many parents look for additional funding sources through loans such as the Parent Loan for Undergraduate Students (PLUS). The funds are disbursed directly through the U.S. Department of Education. You will be asked to fill out an application, and your credit history will be reviewed for any adverse activity (such as a default on previous debt), though you will not be subjected to a full credit check. If you don’t meet the minimum criteria, you may need an endorser for the loan. If you are denied a PLUS loan, your child may qualify for additional unsubsidized Stafford loan funds.For more information, visit:
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 your credit history or your child’s. In addition, the student loans they offer you could leave you even further in debt, so do your research carefully.

Saving on federal taxes through tax credits

In addition to financial aid, there is an indirect way to reduce the college bill through federal tax reductions. There are four tax breaks for college students and recent graduates. Some benefits have income and other restrictions. More information can be found in IRS Publication 970 ( Tax Benefits for Higher Education.


Current college students paying interest on unsubsidized loans and graduates who are repaying their loans can claim a tax deduction of up to $2500 depending on your total income. There has been a ruling that interest paid on the parent PLUS loan also qualifies, but check with a tax expert before taking that deduction.
There are two tax credits available to help you get some money back on the cost of tuition: the American Opportunity Credit (,,id=205674,00.html ) and the Lifetime Learning Tax Credit ( Since they are both tax credits, you subtract the amount for which you are eligible right off your tax bill. You must choose which credit to take per qualifying student based on which is more beneficial for you.

  • Lifetime Learning Credit: Maximum credit is worth up to $2,000 per return if the adjusted gross income of a family is $120,000 (if parents are married and filing jointly) or $60,000 (for singles). There’s no limit on the number of years you can qualify for this credit.
  • American Opportunity Tax Credit: Maximum annual credit here is worth $2,500 and is available to individuals with an adjusted gross income below $80,000 or married couples who file jointly and earn less than $160,000. It’s only available for four years of education.
This is a deduction (not a credit), which can reduce taxable income by as much as $4,000 depending on your total income. This deduction may benefit students who do not qualify for either the American Opportunity or Lifetime Learning tax credits. You must decide whether to claim the tuition and fees tax deduction or claim the American Opportunity or Lifetime Learning Credit per qualifying student in the tax year.
Students who are required to move to take their first job qualify for a deduction for the cost of moving themselves and their possessions. More information can be found in IRS Form 3903 ( questions on how to claim tax credits or take deductions on your college expenses, please visit or speak with a tax professional.

RecessionStrategies in Times of Recession

Tuition is always difficult to afford. During a recession, these bills can feel like an insurmountable barrier between your child and their future. But there are things besides just cutting back on household expenses that can help you survive a bad economy and help you put your child through school.
Here’s just some of them:

responsibilityTeaching your child financial responsibility

As the parent of a future college student, you have a lot to worry about already: from how you’ll handle the empty nest to paying tuition bills.

One huge and often unspoken subject between parents and their (almost) adult children is financial responsibility. But you have so many years they haven’t lived through yet, and so much knowledge. Use it to help your child understand how to manage money responsibly.


Saving for College