As the cost of higher education continues to rise, many parents and young people struggle with how to cover the cost of college education. What are your options when planning for education funding?
529 Plan– These types of plans allow you to contribute after tax dollars that grow tax free. Qualified withdrawals from the plan are not taxed when used for qualified education expenses. You can choose a savings plan that works similar to an IRA , which allows the student to attend a school of his/her choice. Or, you can choose a pre-paid plan that allows you to pre-pay part or all of the costs of an instate public college education.
Life Insurance – Some types of life insurance build cash value and also provide a death benefit. If funded properly, you can access the cash value at the time the child attends college. Keep in mind that accessing the cash value, could also affect the death benefit provided under the policy.
Student Loans- Student loans can be helpful but it is important to remember that students may have to divert funds in the future to repay loans. These are funds that could be used to be used to accomplish other financial goals. If borrowing becomes a necessity, parents could also take a home equity loan and deduct the loan interest at tax time.
Transferring Funds to Children- Parents and grandparents can gift up to $14,000 to each child without gift tax consequences.
Tax Credits- The American Opportunity Tax Credit and Lifetime Learning Credit are tax credits available to full time students. Household income guidelines do apply, so be sure to check the IRS website to see which option might work better for your family.
Education Savings Account- Parents, guardians, or other qualified individuals can contribute up to $2000 per year on behalf of eligible students under age 18. Withdrawals from the account are not taxable if used for qualified education expenses. All funds must be distributed within 30 days of the participant’s 30th birthday.
The cost of funding higher education can be daunting! It’s important to consider many options when thinking about how to fund the cost. All of the above options are various mechanisms available to do so. It’s also important to consider what types of grants might be available when selecting educational funding options.