Back to All Posts

7 Financial Tools that Will Help You Pay for College

Jun 9th, 2020 • Damian Dunn

A college education is expensive. This isn’t exactly a newsflash. However, it’s a good idea to be aware of the different ways you can prepare for the upcoming tsunami of expenses as well as knowing what tax credits and deductions you may be able to cling to as the waters rise. I expect your familiarity with the following to vary greatly, and that’s ok. It’s better to know now than not at all. Here are 7 tools for saving and preparing for college you should know and understand:

529 Savings Plans

There are two types of 529 plans: A savings type account and a prepaid tuition account. Most people utilize the savings account for a few reasons. First, your contributions will grow tax deferred and if the money is spent on qualified expenses, it can be withdrawn tax free. That’s a great deal. Next, the money can be used at any college or university in the country as well as registered apprenticeship programs. Finally, many states offer state income tax incentives to encourage contributions to the 529 plan for its residents. 

Prepaid tuition plans aren’t offered in every state, though some individual universities offer options, as well. Essentially, you can lock in today’s tuition rates by prepaying for a student who may not graduate high school for years to come. The downsides? The options are considerably more limited than the savings plan version and expenses outside of tuition aren’t eligible for coverage. 

Coverdell Education Savings Accounts (ESAs)

ESAs, formerly known as Education IRAs, haven’t been around as long as 529 plans (1996 vs 1997) and are a bit more restrictive when it comes to contributions. ESAs have income limits and phase-outs, contributions can’t after the beneficiary reaches age 18, and the total of the contributions can’t exceed $2,000 per year for any beneficiary regardless of the number of ESAs open for their benefit. 

On the plus side, contributions will grow tax deferred and distributions will be tax free for qualified education expenses, just like 529 savings plans. 

ESA accounts are established at a brokerage as opposed to 529 plans that are established with a specific state through a third party. 

One last note, any left over funds in a 529 account can be left to grow after the beneficiary has completed their education. The account owner has the option of changing the beneficiary to another family member if they choose to. An ESA, however, must be closed with all funds distributed by the time the beneficiary reaches age 30 if the account is not rolled over into another ESA for a younger beneficiary. 

Education Savings Bonds

The Education Savings Bond program began in 1990 and promised that taxpayers wouldn’t have to pay tax on interest if the bonds were redeemed to pay for tuition. To qualify, you or you and your spouse must buy a Series EE or Series I bond and your modified adjusted gross income must be below $94,550 or $149,300 (single/married). 

While this option may not yield the greatest return on investment, there are more people than you think who are very conservative with their money and prefer to not invest their money in the stock market. Savings Bonds are easy to purchase and this program allows financially cautious and conservative individuals and families the chance to enjoy a tax benefit (albeit a relatively small one) by saving ahead for a college education. 

Employer Paid Tuition

We’re going to change things up a bit with this one and focus on individuals that have already joined the workforce but are still pursuing an education. Full-time employees can have up to $5,250 per year of qualified education expenses paid for by their employer tax-free. If you find yourself in this position, make sure you check with your employer to see if they have any kind of tuition assistance program as a benefit as it could make a significant difference in your education expenses

Lifetime Learning Credit

This credit offers up to 20% of the first $10,000 spent on tuition and fees, or $2,000. Transportation and living expenses can’t be included in trying to reach the $10,000 cap, however, books and supplies are fair game.

Who can claim this credit? Undergrads, graduate students, vocational students, or the parents who claim them as dependents. Of course, your eligibility will depend on your modified adjusted gross income (MAGI), as well. If your MAGI was over $68,000 and you file as single or beyond $136,000 married filing jointly, this credit isn’t available to you. If you made less than that you should have something available. Additionally, you can claim this credit an for an unlimited amount of years during your lifetime. 

One last note, you aren’t allowed to claim the Lifetime Learning Credit and the American Opportunity Tax Credit at the same time. Bummer, I know. 

American Opportunity Tax Credit

The American Opportunity Tax Credit is available to help offset the costs of tuition, supplies, books, school fees for undergraduate students or their parents who claim them as dependents. The calculation of the credit is a bit different on this one, so pay close attention. The first $2,000 of expenses incurred by the student are 100% eligible. However, only 25% of the next $2,000 of expenses are eligible, bringing the total value of the credit to $2,500.  

As you probably guessed, there are MAGI restrictions on this credit, as well. If you earned more than $90,000 and file single or more than $180,000 for joint filers, you won’t be able to claim any of this credit. 

Finally, this credit can be used only 4 times as it’s intended to line up with how long it takes to achieve an undergraduate degree. This credit is also refundable up to 40% of the credit’s value. In other words, if you’re able to claim the entire credit but don’t owe any tax, you will receive up to $1,000 in a refund. 

Tuition and Fees Deduction

Depending on your tax filing status (single, married filing jointly, etc…) and your modified adjusted gross income (MAGI), you may be able to deduct up to $4,000 per year to help offset education expenses. There are a number of phaseouts based on income to be aware of, but a deduction could still be available to you if your MAGI is even as high as $160,000 and you’re married filing jointly! 

Be aware, however, that this deduction is set to expire at the end of the 2020 tax year. Additionally, you can’t use this approach in tandem while claiming one of the above credits, either. A professional tax preparer or tax prep software should be able to help you make the best decision. 

Student Loan Interest Deduction

Last, you do have the ability to deduct the interest on your student loans. Yes, every year that goes by with you still paying off the loans you needed to get through college, you’ll probably be able to deduct the interest you pay towards them. Student loan interest isn’t an itemized expense, so it’s available to everyone. The only catch? Yep, how much money you make. This deduction will phase out at $80,000 for single filers and $165,000 for married filing jointly. 

Hopefully this list has been helpful to you as you navigate all the different options you have for funding college. As always, Hey Money experts are here to help. With your $19.99 a month subscription you can make unlimited calls with our expert team to come up with a plan for college expenses or to start saving for your kids’ college today.

Sign up for email updates