This is the second of a two-part series on options and strategies for saving for your kids’ college education.
Last week, I provided some methods you can consider to make sure your educational investments grow with your children, such as Florida prepaid plans, Section 529 plans and even Roth IRAS. In today’s column, I want to discuss other financial strategies that can help you pay for your kids’ college.
Some scholarships for college are merit-based. You earn them by meeting or exceeding certain standards set by the scholarship-giver. Merit scholarships might be awarded based on academic achievement (such as Bright Futures) or on a combination of academics and a special talent, trait or interest. A scholarship might cover the entire cost of your tuition, or it might be a one-time award of a few hundred dollars. Either way, there are thousands of scholarships, from all kinds of organizations. They’re worth applying for, because it’ll help reduce the cost of your education.
The Florida Department of Education, Office of Student Financial Assistance (OSFA), administers a variety of state-funded grants and scholarships, such as The Bright Futures Scholarship, to assist Florida residents with the cost of their post-secondary education. There are specific requirements for each.
The Bright Futures scholarship is lottery-funded program composed of three scholarship types that reward Florida high school graduates for high academic achievement. These three programs include the Florida Academic Scholars (FAS), Florida Medallion Scholars (FMS), and the Gold Seal Vocational Scholars (GSVS). In addition to completing high school coursework, students must achieve a minimum grade point average, a minimum ACT/SAT score, and complete a minimum number of community service hours. Visit www.floridastudentfinancialaid.org/ssfad/home/uamain.htm for more information.
Federal Work-Study programs
Work-study programs offer part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. The program encourages community service work and work related to the student’s course of study. For more information go to https://studentaid.ed.gov/
Grants and Financial aid
Grants and scholarships are often called “gift aid” because they are free money —financial aid that doesn’t have to be repaid. Grants are often need-based, while scholarships are usually merit-based. Grants and scholarships can come from the federal government, state governments, the college or school, or from a private or nonprofit organization.
Since money in a child’s savings account is typically taxed at a lower rate than that of a parent’s income, many parents are inclined to put money in their child’s name. Unfortunately this strategy may work against you if you apply for financial aid. Keeping funds in a child’s name can reduce your financial aid package because the formula that colleges use for aid assesses a family’s need based on up to 5.64% of parents’ available assets and on 20% of assets in a child’s name or custodial account. For more info go to https://studentaid.ed.gov/types/grants-scholarships
If your child applies for financial aid, you may be offered loans as part of your school’s financial aid offer. A loan is money you borrow and must pay back with interest. It’s important to understand what types of loans you are offered. Generally, there are two types of student loans: Federal student loans (loans funded by the federal government) and private student loans (loans made by a lender such as a bank, credit union, state agency or a school). If money is to be borrowed to cover college or career school costs, it is suggested to start with a federal student loan. It is also important to remember to borrow as a last resort and only what is needed.
You must repay your federal student loans, even if you don’t complete your program of study, can’t find employment after graduation or aren’t satisfied with or didn’t receive the education or other services you expected and paid for with your federal student loans. Using an interest rate of 6.8%, the average loan debt for a single year of college is estimated at $6,707.50; the average debt for a 4-year college student: $26,830.
Federal student loans include benefits such as fixed interest rates and income-based repayment plans. Students do not have to start repaying until graduation or when enrollment status changes to less than a half-time status. Interest may be tax deductible and no cosigner may be needed. Some loans may be forgiven. Private loans, in contrast, are generally more expensive. They typically come with variable interest rates, require payments while you are in school, and are unlikely to offer loan forgiveness.
More information can be found at: https://studentaid.ed.gov/types/loans/federal-vs-private.
Parents who qualify can take advantage of two federal tax credits for tuition costs — the American Opportunity Tax Credit and Lifetime Learning Credit. These programs help reduce the tax you owe and you can use these credits against tuition payments that you make using student loans. To qualify for these credits, your adjusted gross income must be less than $80,000 (single) or less than $160,000 (married, filing jointly).
The American Opportunity Tax Credit is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. This program allows you to cut your taxes by up to $2,500 a year per child for qualified tuition and fees paid during the first four years of college — 100% of the first $2,000 in tuition, and 25% of the next $2,000. That means you need to have at least $4,000 in tuition expenses to get the full credit.
The Lifetime Learning Credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses--including courses to acquire or improve job skills. It allows you to cut your taxes by up to $2,000, regardless of how many children you have in college at one time. You can take 20% of the first $10,000 in qualified tuition and fees but you can’t claim it in the same year that you take the American Opportunity Credit for the same student. There is no limit on the number of years the Lifetime Learning credit can be claimed for each student.
Laurie Futterman ARNP is a former Heart Transplant Coordinator at Jackson Memorial Medical Center. She now chairs the science department and teaches gifted middle school science at David Lawrence Jr. K-8 Center. She has three children and lives in North Miami.