By MARY DEIBEL
Scripps Howard News Service
January 27, 2006
- Starting Jan. 1, students attending college next fall may submit their Free Application for Federal Student Aid, or FAFSA, the starting point for most college grants, loans, scholarships and work-study program applications. Application forms are posted on the www.fafsa.ed.gov Web site of the U.S. Department of Education with help also available through www.finaid.org and elsewhere online.
- January also ushers in tax season, when families start scouting tax breaks available for higher education, including deductions and credits along with tax-sheltered savings plans that can be tapped for tuition and other costs.
It's not easy fitting together financial aid pieces when college costs are rising at double the inflation rate and when average tuition, room and board at a four-year public college runs $12,127, or $29,026 for a four-year private school, College Board President Gaston Caperton says.
Financial planning for college gets an added twist this year because Congress is poised to clear legislation for President Bush on Feb. 1 that will cut federal student loan programs by $12.7 billion the next five years, the largest cut ever in student aid.
The good news is that the pending Deficit Reduction Omnibus Reconciliation Act will increase grants for low-income students, do more to help members of the military with higher-education expenses, and raise student loan limits for those who must borrow.
The bad news is that the changes will add to most students' debt burdens over the long haul, says Mark Brenner, vice chairman of College Loan Corp., the San Diego-based student lender.
The changes, slated to kick in July 1, 2006, will end variable interest rates for new student loans, increase rates for parents' PLUS loans, and abolish loan consolidations for students still in school. For students with the typical $20,000 student loan, the change could mean $2,000 more in interest payments over the standard 10-year life of the loan.
With a record 17 million students headed for college next fall facing a shrinking pie of student aid, Brenner says, it's critical "to complete the FAFSA as soon as possible, so families can secure the best possible financial aid package," including merit-based awards that typically are awarded on a first-come, first-served basis.
The federal deadline for filing a FAFSA for the 2006-07 school year is July 2, 2007, but many private colleges have earlier cutoff dates that can be as early as Feb. 1 and deadlines for state aid vary across the map, says Erin Korsvall of Sallie Mae, the suburban Washington government-sponsored entity that is the top student-loan maker.
Sallie Mae has a free online site - www.collegeanswer.com - that lets them plan or pay college finances including scholarship searches and also published its first book, "How to Pay for College," with a full chapter on completing the FAFSA form.
The typical student or parent taking out student loans on or after July 1 likely will see larger interest and principal payments when the average student today graduates with $20,000 in student loan debts.
Looking to the tax code to cut college costs, editor Bob Scharin of RIA's Practical Tax Strategies, a monthly journal for tax professionals, cites the following tax breaks:
- For 2005, there is an above-the-line deduction of up to $2,500 for interest paid on higher-education loans, available in full to single filers earning less than $50,000 and joint filers with less than $105,000, whether they itemize or not. The deduction phases out for single filers making $65,000, or $135,000 for couples.
- There's also an above-the-line deduction of up to $4,000 for college tuition and fees for single filers with Adjusted Gross Income of less than $65,000, or $130,000 for joint filers. Single taxpayers with up to $80,000 income, or $160,000 for joint filers, can deduct up to $2,000 for 2005, although Congress will have to act to extend the tuition deduction for 2006 or later.
- Families with students already in school may also qualify for Hope Scholarships of $1,500 a student the first two years of higher education and Lifetime Learning tax credits of $2,000 a taxpayer for additional years of college or graduate education. Both credits phase out between $43,000 and $53,000 for single filers, and $90,000 and $110,000 for joint filers for 2005, however, and credits cannot be claimed the same year a taxpayer takes tuition or student-loan interest deductions.
The same restrictions apply for taxpayers planning to claim Hope and Lifelong Learning credits in 2006, when Adjusted Gross Income ranges for both will increase and phase out between $45,000 and $55,000 for single filers and $90,000 and $110,000 for joint returns.
Families saving up for college can use Qualified Tuition Plans such as pre-paid tuition programs and 529 investment plans offered by states or a private consortium of colleges. The 529 plans, named for their section of the tax code, operate like mutual funds and let taxpayers contribute after-tax money for the promise of tax-free withdrawals for higher-education costs.
Colorado, Illinois, New Mexico, South Carolina and West Virginia also let taxpayers deduct the full contribution from state taxes, and 18 other states have partial deductions atop federal tax breaks, says tax analyst John Roth of tax publisher CCH Inc.
However, not all state plans are equal, including fees, investment choices and the like, so you need to consider the overall return on your investment.
These savings plans let wealthy a parent or grandparent to contribute lump sums up to $55,000 through 2005 to jumpstart a child's 529 account without exceeding the $11,000 limit on the federal gift tax. With the gift tax exemption rising to $12,000 this year, the new lump-sum 529 contribution is $60,000, or $120,000 for couples.
But not every family is that rich, or generous, says college savings strategist Bruce Harrington of MFS Investment Management. He says the average family may find it's better to save through a traditional tax-deferred or Roth after-tax Individual Retirement Account. Their rules let you withdraw money for qualified higher-education costs without owing a 10 percent early-withdrawal penalty you'd pay if the money were in an employer 401(k)-style retirement savings plan.
A further option, Harrington says, is to negotiate a package with college aid offices that includes tax-free loans and grants. "Too few people know that negotiating is an option, including working with top-notch schools like Princeton that work to ensure no qualified student is turned away for financial reasons," Harrington said.
However, "negotiating the right financial package with more than one school has become so complicated that it's given rise to the certified college planner, similar to the certified financial planner."
Should you access retirement savings for college, Scharin offers one final caution: Be careful how you access your money. He cites the case of a certified public accountant who quit a leading global accounting firm to get his doctorate and tried paying for it with his 401(k) plan. The U.S. Tax Court hit him with the 10 percent early-withdrawal penalty, plus income taxes on his tuition money. Had he rolled over his 401(k) into an IRA first, the court spelled out in Keith Lamar Jones v. Commissioner of Internal Revenue, the rules would have let him pay for grad school without that 10 percent penalty. The decision is posted online at www.ustaxcourt.gov
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