Tips for parents: saving, paying and borrowing for your child’s college education
Determine the Expected Family Contribution (EFC) Toward College Costs
As a parent, how much you are expected to contribute toward your child's college education is determined by the federal government based on information you provide in the Free Application for Federal Student Aid (FAFSA). In the application process, you are asked to provide information regarding both your finances and your child’s, including income and assets. You are also asked how many dependants you have and how many family members will be attending college at the same time. This information is analyzed to determine what you can contribute toward your child's educational expenses, which is called the Expected Family Contribution, or EFC. The lower your EFC, the more grants and loans your child will be qualified to receive.
Prepare for College Costs by Pre-Paying Tuition
A number of colleges and universities participate in pre-paid tuition programs for future students. This is quite an advantage to parents who can invest money now and lock in the tuition rate for their children well in advance of when the children will be ready to attend. Some pre-paid tuition plans are managed at the state level, so you need to explore the options available to determine which is best for you. There is also the possibility that this financial move could provide a tax benefit to you, so you may want to ask a tax adviser for more information.
Save for College
While many parents don't heed this advice, the best way to prepare for college is to start saving money when your child is born. Since the cost of a college education increases each year, investing in a special college savings plan can help you stay ahead of the game. There are special educational plans that provide a tax shelter for your funds until your little pride and joy goes away to college. Many states offer college savings opportunities, such as a Section 529 Education Savings Plan, that allow you to begin investing early. You can also start saving in your child's name through the Coverdell Education Savings Account. This plan allows funds to be added until your child turns 18 and also provides tax benefits. To see which option is best for your family, talk to a tax adviser about the benefits and start saving, no matter how old your child is.
Use a PLUS Loan to Pay For College
Your child will qualify for federal funds to pay for college; whether the loans are subsidized or unsubsidized depends on your financial situation. If you have determined need, your child may qualify for subsidized federal funds to help defray the costs of attending college. If you do not qualify for subsidized loans based on your need, you will qualify for unsubsidized loans. Often, these funds may not be enough. Many parents look for additional funding sources through loans such as the Parent Loan for Undergraduate Students (PLUS). The funds are disbursed directly through the U.S. Department of Education. You will be asked to fill out an application, and your credit history will be reviewed for any adverse activity (default on previous debt), though you will not be subjected to a full credit check. If you don't meet the minimum criteria, you may need an endorser for the loan. If you are denied a PLUS loan, your child may qualify for additional unsubsidized Stafford loan funds.
Know The Tax Benefits of College
The advantages of a higher education can include a credit on your annual federal tax return. There are actually two credits available, but you can take only one each year. With the Hope Scholarship, you may be eligible to take a credit to cover tuition and fees up to $1,650 per eligible dependent child. The student must be enrolled on at least a part-time basis, and the credit can be taken only for two years. Another possible option is the Lifetime Learning Credit. This provides a maximum credit of $2,000, or up to 20 percent of tuition and fees. How many hours a student is enrolled does not matter, and it can be used for all family members enrolled in college. Both of these tax credits are subject to income guidelines outlined by the Internal Revenue Service. You should check with a tax adviser to see if you qualify for either one.
Use Your Home Equity for College Expenses
Don't forget about the equity you have accumulated in your home over the years. You may actually find acquiring a home equity loan is a better option for you than accumulating student loan debt, because your home equity loan may qualify you for additional tax benefits.
Watch Out for Loan Scams
Navigating the financial aid process can seem daunting the first time you have to go through it. When an advertisement comes in the mail or a salesperson calls offering to do all the work for you, you may be tempted. Some ads even promise that your child will qualify for financial aid regardless of your credit history. What they all have in common, though, is that they want you to pay a fee for this service. Don't let yourself be taken in by these offers. Applying for federal financial aid is free and qualifying for aid really depends on your financial situation. Some of these student loan scams take advantage of the uninformed and could end up destroying you or your child's credit history. In addition, the student loans they offer you could leave you even further in debt. Do your research carefully!
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