Educational Financing Options
As the cost of higher education continues to rise, many parents and youth struggle to figure out how to cover the cost of a college education. Public and private school costs. What are your options when planning education financing?
529 Plan – These types of plans allow you to contribute after-tax dollars that grow tax-free. Qualified plan withdrawals are not taxable when used for qualified education expenses. You can choose a savings plan that works similar to an IRA, allowing the student to attend the school of their choice. Or, you can choose a prepaid plan that allows you to prepay some or all of the costs of a public in-state college education.
Life Insurance – Some types of life insurance build cash value and also provide a death benefit. If properly financed, you can access the cash value by the time the child attends college. Keep in mind that access to cash value could also affect the death benefit provided by the policy.
Student Loans: Student loans can be helpful, but it’s important to remember that students may have to divert funds in the future to repay the loans. These are funds that could be used to achieve other financial goals. If borrowing becomes a necessity, parents can also take out a home equity loan and deduct the interest on the loan at tax time.
Transferring Funds to Children: Beginning in fiscal year 2017, parents and grandparents can gift up to $14,000 to each child with no tax consequences on donations.
Tax Credits: The American Opportunity Tax Credit and the Lifetime Learning Credit are tax credits available to full-time students. Household income guidelines apply, so be sure to check the IRS website to see which option might work best for your family.
Education Savings Account: Parents, guardians or other qualified individuals may contribute up to $2,000 per year on behalf of eligible students under the age of 18. Withdrawals from the account are not taxable if used for qualified educational expenses. All funds must be distributed within 30 days of the participant’s 30th birthday.
The cost of financing higher education can be daunting! It is important to consider many options when thinking about how to finance the cost. All of the above options are various mechanisms available to do so. It is also important to consider what types of grants might be available when selecting educational financing options.