Tax breaks and loan options to pay for college
叠测听
Learn more about Mike on NerdWallet鈥檚聽.
Your child has selected a college, and now comes the fun part: figuring out how to pay for it.
As the four-year cost of college can range from $100,000 to $280,000 per child, parents must have a plan for how to fund their children鈥檚聽higher education. It鈥檚 especially important because insufficient funds is聽a primary reason kids drop out of school.
First, a suggestion: Manage your children鈥檚聽expectations by talking聽with them early on about聽what you can afford to pay for college. You don鈥檛 want your kids聽to spend years imagining a certain college that you know you can鈥檛聽afford even with financial aid.
There are various sources of funding that can help you pay for your children鈥檚聽education. Here we鈥檒l look at two main ones: tax assistance and loans.
Tax assistance
Many families earn too much money to qualify for need-based financial aid, but they may be聽eligible for tax breaks.
罢丑别听聽is a tax break available to help you pay for up to four years of undergraduate education for yourself or your dependents. As a tax credit, the AOTC gives you聽a dollar-for-dollar reduction in your total tax bill. In 2016, the credit could reduce your tax bill by up to $2,500 per student.
The credit consists of 100% of the first $2,000 of qualified education expenses 鈥� tuition, fees and course materials 鈥� and 25% on the next $2,000. However, the AOTC phases聽out at higher income levels 鈥� $160,000 to $180,000 for married couples filing jointly and $80,000 to $90,000 if the tax filer is single or head of household.
罢丑别听聽is geared toward graduate school. It鈥檚聽a $2,000 tax credit for $10,000 of expenses, but it has lower income limits than the AOTC credit 鈥� $55,000 for single filers and $110,000 for married couples filing jointly.
If your income is too high for tax credits, you may be able to give your child stock that has gained in value and eliminate up to $28,000 of capital gains by using a combination of the standard deduction, personal exemption and AOTC. It鈥檚 a complicated strategy, so I recommend working with a financial planner or tax advisor to implement it.
Loan options
If your family鈥檚 college savings and any available tax credits don鈥檛 reach far enough, your children could turn to聽student loans 鈥� but they should be cautious about taking on too much debt. According to the Institute for College Access and Success, the average college student had $28,950 of debt in 2014, a 56% increase over the past 10聽years.
If loans become necessary, here are some options.
FEDERAL DIRECT SUBSIDIZED LOAN
After your student fills out the Free Application for Federal Student Aid () and demonstrates need, the U.S. Department of Education may offer a聽, also known as a Stafford loan. With this subsidized loan, which is available to undergraduates who demonstrate financial need, the government pays the interest while your student is in college. Since interest doesn鈥檛 accrue until after graduation, he or she can accept the loan and pay it off after graduation.
Loan limits are based on years in college 鈥� $3,500 in year one, $4,500 in year two and $5,500 for however many more聽years your student needs聽to earn an undergraduate degree.
FEDERAL DIRECT UNSUBSIDIZED LOAN
This unsubsidized version of the Stafford loan differs in a few key ways: It鈥檚聽open to both undergraduates and graduate students, there is no requirement to demonstrate financial need, and聽your student will be charged interest while he or she is聽in college. 罢丑别听annual limit on these loans is聽$5,500 in year one, $6,500 in year two, and $7,500 in year three and beyond. This loan may be an option for聽parents and students who can鈥檛 demonstrate financial need but nonetheless require assistance to pay for school.
PARENT PLUS LOANS
Another option is聽, which are federal loans that you聽can take out each year to cover the full cost of your聽child鈥檚 education. This can become a large additional debt burden, and payments could stretch well into your retirement years, so think carefully about whether this is the right option for you.
PRIVATE STUDENT LOANS
A variety of banks and other lenders offer聽,聽which typically carry variable interest rates, origination fees and other charges. Almost all private loans require a co-signer.
Private loans lack the flexibility of federal loans, and generally their repayment and forgiveness options aren鈥檛 as advantageous. Therefore, your family should turn to private loans only聽after taking full advantage of other resources.
It鈥檚 important to understand your family鈥檚 options, when to use what funds and how it affects your child鈥檚 overall financial aid eligibility. Working with a qualified fee-only financial planner can help you make smart decisions.
聽is a financial planner at聽聽in Raleigh, North Carolina. A summary of this blog is also available聽聽on the Financial Symmetry website.
This story originally appeared on .
