College can be expensive, and student loans can create a lifetime of debt. Finding ways to decrease costs can help make college a reality for your child. Beyond doing well in school, studying to perform well on standardized tests and applying for scholarships and financial aid, there are also other ways parents can help their children save money on college tuition. However even before your children enter high school, you can start saving money to help them afford college. College saving plans and tax benefits are two ways to help your child earn a college degree.
Tax Credits for Higher Education Expenses: You can reduce the amount of income tax you pay through two tax credits. However, you cannot claim both of the below tax credits for the same child in the same year. Follow the links below to see which options provides the best benefit for your student.
- Through the American Opportunity Credit you can claim up to $2,500 per student per year for the first four years of school.
- Through the Life Learning Credit you can claim up to $2,000 per student per year for any college or career school tuition and fees as well as books, supplies, and equipment required for courses and purchased from school.
- One tax credit might save you more than the other depending on your situation. To compare the two tax credits, follow this link.
Student Loan Interest Deduction: You can receive a tax deduction up to $2,500 a year on the interest paid on student loans either for yourself, your spouse or your dependent. This deduction applies to all loans used to pay for higher education expenses.
It is never too soon to start saving for college. There a few different accounts that allow you to put aside funds that will not be taxed.
Through a Coverdell Education Savings Account you can put aside up to $2,000 a year in a special Education IRA for each of your children under the age 18.
A Qualified Tuition Program (QTP or a 529 Plan) is established by a state so you can either prepay or save up to pay education-related expenses. When you withdraw the money, it will not be taxed. Each plan is state specific. See what plan your state offers.
For Texas students only:
- Texas College Savings Plan (The Texas 529 Savings Plan): This plan provides tax-free investment growth and tax-free withdrawals on earnings used for higher education expenses. There are multiple savings options and investment portfolios.
- Texas Tuition Promise Fund: This fund is designed to help families and individuals pre-pay for all or some future tuition and required fees at any two- or four-year Texas public college or university. Account holders purchase Tuition Units, which represent a fixed amount of undergraduate resident tuition and required fees charged by Texas public colleges and universities.
Our key message for students? It is important to do everything you can to avoid debt. Most students who accumulate it, find that it takes years to pay off and often doesn’t yield the kind of results you would like. Be sure that if you take on debt, you get a degree in a field that matters to you. Simply earning any old degree will not serve you well in the long run and will likely make it harder to pay off loans.
College can be an exciting time. Make the most of it by doing the work beforehand to reduce the cost of it as much as you can.