College Saving Basics: What You Need To Know To Plan Wisely Massachusetts

If you don't want to be one of those people paying back college loans into your forties, it's time to get schooled on college saving basics.

Savings 101

The key to college saving basics is starting early. If you put a little money away each month, you'll have amassed quite a bit by the time college rolls around. The interest you receive isn't bad either; the longer you save, the more free money you receive. For example:

• Parents, if you save $50 per month from the time your child is born to high school
graduation, you'll accrue more than $10,000 with an additional $6000 in earned interest.
• Students, if you save $20 a month from thirteen to eighteen years old, you'll save
$1,200 with an earned interest of $72. That's money for books!

These savings can be used toward college costs in lieu of taking out loans that you could be paying back for years to come.

More Savings = Less To Borrow

Here's the rundown. After you complete and submit the Free Application for Federal Student Aid (FAFSA), you'll receive a Student Aid Report (SAR) with your Expected Family Contribution (EFC). The EFC determines how much you and your family are expected to contribute toward college costs, which directly affects how much federal, state, and institutional aid you will be awarded.

Your EFC is calculated using the asset and income information you and your family submitted on the FAFSA. Savings are an asset, and in the FAFSA calculation formula, an asset protection allowance is applied and then only a small percentage of the remaining assets is counted in the calculation of your EFC, which means you can use your savings to pay educational costs rather than taking out a loan. More assets can mean a slightly higher EFC, but also that you will need to borrow less.

College Savings Plans

So now that you know how important it is to save money for college, let's look at how certain Federal Education Savings Plans offer you attractive tax incentives to get the job done.

• 529 College Saving Plans are maintained by each state and allow you to save money tax-
free for qualified educational expenses such as tuition and fees and room and board. The
529 is:

o Without residency restrictions or required income levels, which means you can
participate in any state-operated program.
o Accepted by most accredited institutions and easily managed by the account holder for
the life of the account.
o Open to accept contributions (up to $300,000 in some states) by anyone, not just your
family.
o Set up to distribute earnings tax free, unless the amount withdrawn is more than the
qualified educational expenses for the beneficiary that school year.

• Coverdell Education Savings Accounts, formerly Education IRAs, let you put away $2,000
per beneficiary per year and use the money tax-free to pay for college expenses.Parents,
if you start saving from birth to eighteen years, you'll have over $50,000 dollars ready
to go for your college-bound child.

o ESAs are accepted at nearly all accredited educational institutions including private,
public, and vocational schools.
o If you make over $95,000 as a single filer or $190,000 as a married couple filing
jointly, your contribution limit could be reduced.
o The distribution of the account could be taxable to the beneficiary if the
distributions are more than the beneficiary's education expenses for that year

• IRA Accounts allow you to withdraw funds to pay higher education expenses for yourself,
your spouse, your child, or grandchild.
o You will owe federal income tax on the amount withdrawn, but are not subject to the
10% early withdrawal penalty.
o You can withdraw investment earnings tax-free if you're over 59 1/2 and have had your
IRA for at least five years.

There are a number of different types of savings programs available for both parents and students. It's a good idea to start saving now in order to pay for college costs later. The more money you can save for your education now, the less you should have to borrow later. Good luck generally comes from good planning!

Starting in the 2009 tax year, under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American Opportunity Credit, to pay for college expenses.

The American Opportunity Credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits

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