Funding a College Education

Today it is common to pay upwards of $100,000 for a four-year college education. With a 4% increase in costs per year, this equates to a $200,000 bill for a child who enters college in 18 years. Apart from earning a scholarship or going into permanent debt, what can be done to plan for this monetary dilemma? One answer is to make use of the tax breaks offered by the government.

In 1997 two tax credits targeted at educational costs were created: the Hope Scholarship and the Lifetime Learning Credit.

The Hope Scholarship permits a tax credit of up to $1,500 a year for the first two taxable years that your child is in college. Because this is a dollar-for-dollar credit, it usually carries more weight than a tax deduction.

The Lifetime Learning Credit can be used in any year for an unlimited period of time. It provides a 20% credit on the first $5,000 of qualified expenses including education expenses to acquire or improve job skills. After 2002 this credit is scheduled to increase to 20% of the first $10,000 of qualified expenses. Unfortunately, both the Hope Scholarship and Lifetime Learning Credit phase out at income levels of $80,000 to $100,000 for joint filers and $40,000 to $50,000 for others.

Another valuable tool is the Education IRA which allows contributions of up to $500 a year for each child under age 18 to be placed into an IRA established for education expenses. However, the benefits of the IRA can be lost if the assets are not used to pay for educational expenses when the child enters college. The phase out for the Education IRA is between $150,000 and $160,000 for joint filers and $95,000 to $110,000 for others.

While taking advantage of the Hope Scholarship, Lifetime Learning Credit and Education IRAs can take the bite out of the college bills, there is little to replace the benefits of planning well before the need arises.

— Leslie Heffernen

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