As the cost of higher education continues to rise, many parents and young people are faced with how to cover the cost of a college education. State and private school costs- 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 taxable when used for qualified education expenses. You can choose a savings plan that works similar to an IRA, which allows the student to attend the school of his or her choice. Or, you can choose a prepaid plan that allows you to prepay some or all of the costs of a state public college education.
Life Insurance – Some types of life insurance accumulate cash value and also provide a death benefit. If properly funded, the cash value can be accessed at the time the child attends college. Note that access to the cash value may 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 the loans. These are funds that could be used to achieve other financial goals. If loans become a necessity, parents could also take out a home equity loan and deduct the interest on the loan at tax time.
Transfer of funds to children- Beginning with the 2017 tax year, parents and grandparents can gift up to $14,000 to each child without gift tax consequences.
Tax Credits- The American Opportunity Tax Credit and the Lifetime Learning Credit are tax credits available to full-time students. Family 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 eligible individuals can 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 funding higher education can be daunting. It is important to consider many options when thinking about how to fund the cost. All of the options mentioned above are various mechanisms available to do so. It is also important to consider the types of grants that may be available when selecting education funding options.