Higher Education Funding

1. 529 plans still tax free
There has always been some uncertainty about whether Congress would allow 529 plans’ tax-free treatment to expire. Jeffrey and Marcene’s advisor clarified matters: The Pension Protection Act of 2006 permanently extended the Section 529 provisions regarding these vehicles.

The most well known type of 529 plan is the college savings plan, in which they can set money aside to pay their daughter’s qualified higher education expenses. The other type is the prepaid tuition plan, with which they can secure future tuition at today’s prices, regardless of how much tuition increases.

529 college savings plans tend to be popular because funds invested in them grow tax free. And as long as withdrawals are used for their daughter’s qualified college education expenses, they’re tax free as well.

2. Education credits continue to increase
Don't overlook the Hope credit and the Lifetime Learning credit.

For qualified tuition and related expenses required for enrollment on at least a half-time basis, the maximum credit, adjusted annually for inflation, is $1,650 per student for 2007 and will likely be much higher by the time their daughter is in college.

Similarly, they may be eligible for the Lifetime Learning credit of up to $2,000 per taxpayer for an unlimited number of years of postsecondary, graduate and certain other education expenses. If parents joint income is too high to qualify for either credit, their  child student may be able to claim it.

Find out how a Tax Services can add value to your business.

3. IRS permits tax-free prepaid tuition
Jeffrey and Marcene mentioned that their daughter’s grandparents may want to contribute financially to her education, too. This reminded their financial advisor of a recent IRS Private Letter Ruling (PLR), No. 200602002, in which the IRS permitted a taxpayer to prepay tuition for his six grandchildren through 12th grade — without triggering estate, gift or generation-skipping transfer (GST) taxes.

She went on to say that, though a PLR applies only to the taxpayer who requested it and sets no legal precedent, this one provides guidance on how the IRS may rule in similar cases. And many generous grandparents are considering the estate planning benefits of prepaying their grandchildren’s college tuitions.

The main disadvantage of the technique, besides its legal uncertainty, is that it tends to be somewhat inflexible. It’s vital, therefore, to understand the rules. For example, there’s no guarantee the money will be returned if the child doesn’t attend college.

Thinking ahead
When it comes to funding a college education, it certainly pays to stay informed. Jeffrey and Marcene did just that — and you should, too.

25 can't-miss funding tips
By Cheryl Allebrand • Bankrate.com


Are you set to shuffle off to school soon but don't know what to do about the gap in costs versus cash, or are you hesitant to enroll because you don't know how you'll ever fund it without signing your life away to loans?

College expenses don't end with tuition and run the gamut from computers to late-night pizza. Follow the cost-cutting strategies below to make your college dreams a reality and keep you out of line at the plasma donation center.


Get last-minute money for college


1. Start at a junior college. 13. Seek out employer programs.
2. Check out student exchange. 14. Accelerate studies.
3. Work for housing. 15. Sniff out school discounts.
4. Buy textbooks used. 16. Divide to conquer.
5. Lock in tuition rates. 17. Work it with work-study/co-op.
6. Get forgiven. 18. Get paid.
7. Let the Army pay. 19. Opt out of gifts.
8. Graduate in four. 20. Find last-minute scholarships.
9. Test out of classes. 21. Snap up state preferred-rate loans.
10. Study during breaks. 22. Search out school's own loans.
11. Follow up with Aid Office. 23. Reap repayment discounts.
12. Spend student savings first. 24. Don't skip FAFSA.
25. Take tax breaks.


1. Start at a junior college
Completing your first two years of college at a two-year instead of a four-year institution could save you thousands of dollars. Tuition and fees cost, on average, $2,272 per year at a two-year public institution instead of the average $5,836 charged at four-year public colleges in 2006-2007, according to the College Board's Trends in College Pricing.

On top of that, full-time students enrolled in public two-year colleges receive about $2,200 in grants and tax benefits on average from the federal government, state governments, institutions and private sources. This aid reduces the average tuition and fees paid to a net price of less than $100!

2. Take advantage of student exchange.
Staying in-state or participating in a regional student exchange, in which some states offer reduced tuition rates for students from nearby states, will score you big savings. Out-of-state students attending public colleges and universities pay an average total cost of $26,304 instead of the $16,357 average cost for in-state students, according to the College Board.

3. Work for housing.
Room and board costs can add a whopping $6,000 or more to the cost of your college education -- per year. According to the College Board, room and board fees at public four-year universities averaged $6,960 per year in 2006, rising to $8,149 at private four-year schools. Colleges offer Resident Assistants discounted room and board. Looking for other work-for-room opportunities near campus could really pay off. If possible, stay with mom and dad or another relative -- it's not unreasonable to expect commuting from home to cut your total college expenses in half if you're at a public university.

4. Buy used textbooks.
Not only are you helping save a tree, you could save 50 percent buying used books as opposed to new, according to Mark Kantrowitz, a college funding expert and publisher of FinAid.org. Try finding out what books are needed for your classes as early as possible and before you search the bookstore, look for campus postings and online exchanges. Selling your books when you're finished is another way to defray the cost.

5. Lock in tuition rates.
Opportunities to lock in rates vary widely, with some schools letting you lock in rates for the coming four years at enrollment and others allowing parents to pay years in advance -- some 529 plans are set up to prepay college tuition. According to the College Board, 20 percent of full-time in-state students enrolled in public four-year colleges and universities faced increases in tuition and fees of 9 percent or more in 2006-2007.

Tip: For biggest prepaid savings, start out early, says Nancy Ziering, CCPS (Certified College Planning Specialist) and president of College and Retirement Solutions in Chatham, N.J., an organization that provides families with specialty financial solutions to take the sting out of paying for college.

6. Get forgiven.
There are a number of loan-forgiveness programs available where, in exchange for a period of working for the public good, all or a portion of your educational loans can be canceled.

Look for loan-forgiveness programs in either your home state or the state you want to live in, Ziering suggests. "Research the field of study you want to get a degree in, within the state you reside or want to reside. If you live in New Jersey and want to work in Pennsylvania, New Jersey isn't going to want to forgive that loan. Have a big-picture thought process about where you want to live and what field of study you want to pursue."

7. Let the Army pay.
ROTC (Reserve Officers Training Corps) generally pays all tuition, fees and textbook costs for participants, as well as a monthly living stipend. Because military service is required upon graduation, make sure this is really what you want.

8. Graduate in four.
Taking those extra classes in tennis or underwater basket weaving, while fun, might delay your graduation. Consider whether you could learn these things from other sources or later in life if they're not critical to your success in your chosen field. While technically "free" if you're paying for full-time studies already, extra semesters will cost you thousands. According to the College Board, students take an average of 6.2 years to earn a bachelor's degree in public colleges and 5.3 years to earn a bachelor's degree in private colleges.

9. Test out of classes.
"Reduce costs by taking AP (Advanced Placement Program) classes in high school and earning college credit that will reduce time spent in college," suggests Ziering. Even if you didn't remember to take the APs or weren't enrolled in an International Baccalaureate program in high school, you could still cut your college time and tuition hours by scoring out with CLEP (College Level Examination Program) and PEP (Provenience Examination Program) tests.

10. Study during breaks.
Take summer and winter break courses to shorten your stay. Even better, take them at a cheaper school close to home and transfer the credits. Ziering says: "Once you factor in room and board and other expenses you would have over the course of a year or semester, paying extra for a semester's worth of classes in a six-week period of time will save you money. Even just in terms of time, you'll save."

11. Follow up with aid office.
Make sure to follow up with your financial aid officer if there are big changes or if you have extenuating circumstances such as divorce, loss of job, another sibling starting school, etc. Kantrowitz says: "If there are unusual medical expenses or someone lost a job, there's a process called 'professional judgment' or special circumstances review. The school can potentially make adjustments on inputs into the formula because the federal government leaves discretion up to the school. This is not to be confused with negotiation.

12. Spend student savings first.
Spending down student savings first will cost your family less overall by graduation, because student assets are counted more heavily in financial aid formulas. Spend down student accounts during the first year if possible.

You can find the detailed explanation on Finaid.org (scroll down until you see charts) where the example they draw yields $4,000 in savings by spending student funds first instead of following the suggested parent-student funding allotment. The most expensive alternative was where parents paid all expenses and the student savings fund was never tapped. Going that route cost nearly $7,000 more than following the suggested parent-student allotment. All in all, nearly $11,000 was saved in this example by spending student savings before starting with parent contributions

13. Seek out employer programs.
Your employer might help pay for school, though some programs are more liberal than others. "Your company might offer a college tuition match program. Check with your Human Resources department what the criteria is for employee eligibility," suggests Ziering.

Generous plans cover the children or even grandchildren of employees. For tax purposes, individuals are allowed to exclude $5,250 for educational assistance per year from income.

If you can find work at a college or university, you can almost count on a tuition reduction plan or tuition waiver program, where you and your family members can attend classes for free or at a reduced cost.

14. Accelerate studies.
Even cheaper than finishing in four is getting into an accelerated program where you can earn a three-year bachelor's degree. If you know you want to go to medical school, for example, Ziering suggests looking for schools that offer a six-year medical program or a five-year master's track.

15. Sniff out school discounts.
Check for any and all discounts your prospective school might offer; they're more common than you'd expect. Potential discounts include recruitment discounts, family enrollment discounts, older student discount, partial tuition remission for legacy students and conversion of loans to grants upon graduation.

16. Divide to conquer.
If you're worried about a funding gap but don't want to take out a loan, ask about tuition installment plans. "Tuition installment or payment plans are not a way to reduce the cost of college but rather a way to manage the cash flow," says Ziering. "It allows you to space payments out over the course of 10 months of equal payments. Most schools will offer this, and if not, there may be private programs that will administer this for the school." According to Kantrowitz, some schools don't charge any interest for their tuition installment plans and the up-front fees are often low.

17. Work it with work-study/co-op.
These are two very different programs that offer jobs close to campus and give students the chance to earn money to help with college and living expenses. Work-study jobs -- think library monitor -- are often part of a federally subsidized work-study program and are awarded in your financial aid offer letter. Co-ops offer a study experience combined with meaningful work in your field of study. Look for the Directory of College Cooperative Education Programs in your guidance office or at the library.

18. Get paid.
Before you get desperate enough to sell your plasma or start signing up for paid experiments, consider pounding the pavement for a part-time job. Balancing work and school can be tricky, but nearly half (49 percent) of students work during school, according to the National Association for Education Statistics. Start looking early, because prime gigs near campus fill up fast.

19. Opt out of gifts.
Instead of soliciting graduation checks, ask warm-hearted relatives to pay money directly to your college. "Relatives can pay the money directly to the college without incurring any gift taxes," Kantrowitz says, but he cautions that it's not a charitable contribution and can't be deducted on their income taxes.

20. Slog away at last-minute scholarships.
Scholarships aren't awarded at any one time of the year, so you still might find something. The thing is, they're often awarded far in advance. Although it's doubtful you'll get anything at the last minute, apply for future awards to get a leg up for next term. Kantrowitz, who's also Director of Advanced Projects for scholarship site Fastweb, says: "It's never too late to start searching for scholarships. A lot of people have this idea in their head that scholarships are only for high school seniors, but that's not true, both for current college students and students as young as 13 years old or younger."

21. Snap up state preferred-rate loans.
"Find out from your state if they offer any parent or student loans at preferred rates," suggests Ziering. Remember, small interest rate differences add up.

22. Search out school's own loans.
Before automatically turning to private loans, see if your school has its own loans. Ziering says: "Often elite private schools offer their own loans with more favorable terms to the student and or the family."

23. Reap repayment discounts.
If you are in repayment or before you sign for a loan, ask about discounts. According to Kantrowitz, the most common loan discounts include a quarter-percent interest rate reduction for having your monthly loan payments directly debited from your bank account, waiving Stafford loan origination fees and making all of your monthly payments on time.

24. Don't skip FAFSA.
Apply for FAFSA, even if it's likely too late to receive any grants, because it's a source of cheaper loans. Kantrowitz says: "Apply for FAFSA as soon as possible after January 1, because it makes you eligible both for state and federal aid, and some states have deadlines of March 1. So if you wait to file your taxes, you might be too late." On average, full-time students receive about $9,000 of aid per year in the form of grants and tax benefits in private four-year institutions, $3,100 in public four-year institutions, and $2,200 in public two-year colleges, according to the College Board.

Ziering suggests using estimated numbers if you haven't filed your tax return, but cautions that the award you receive will be based on actual tax information, so you may need to correct your estimated numbers. If you wait until the last second, you may get a loan, but will get little or no aid. Remember, you can apply retroactively until the end of the academic year.

25. Take tax breaks.
Take advantage of tax breaks. Kantrowitz says: "Look to education tax benefits, including the Hope scholarship, Lifetime Learning tax benefits, and the tuition and fees deduction. Eventually you'll take the student loan interest deduction up to $2,500. The typical student can save several hundred up to a thousand dollars or more through tax benefits alone.

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