College Payment Decisions

Are you or a family member on the cusp of making college attendance decisions?  Or have you already decided?  So how will college expenses, tuition, room and board, books and incidentals, living expenses…how will they be paid? Do your have any college payment strategies?

In Central Oregon we have great options where students can live at home while they attend Central Oregon Community College or OSU Cascades.  That can save a significant amount of money.  But that still leaves many school costs to be funded. This is the first in a series of articles designed to help students and their parents make the best choices on how to pay for college.

Borrowing Can Be Expensive

College students who borrow for school graduate with a debt load equivalent to a new-car purchase or a down payment on a house, averaging $25,000.

Some borrowing might be inevitable. To keep it to a minimum, explore the features of other college payment strategies.

529 savings plans

Pros: Your savings grow tax-free and earnings escape federal tax if you use withdrawals for qualified college expenses. Your state might give you a tax break for contributions. You may invest in other states’ 529 plans.

Cons: If you use the money for noncollege expenses you’ll have to pay taxes and a penalty on earnings. A state-appointed firm manages the account you so lose direct control.

Prepaid tuition plans

Pros: You can lock in tuition at in-state public colleges years in advance. The tax benefits are the same as for a 529 savings plan. If your student goes to an out-of-state or private school instead, you can transfer the value of the account or get a refund.

Cons: Not all states participate. If you use the money for noncollege expenses you’ll have to pay taxes and a penalty on earnings.

Coverdell education savings accounts

Pros: The tax benefits are the same as for a 529 savings plan, and Coverdell’s expand the definition of “qualified” to include tuition at private elementary schools and high schools.

Cons: Your contributions can’t exceed $2,000 a year and the beneficiary must be younger than 18; contributions are limited by your modified adjusted gross income.

Roth IRAs

Pros: The money in a Roth grows tax-free. Withdrawals are not limited to qualified education expenses. You can avoid taxes on withdrawals as long as they don’t exceed your contributions. You can avoid a 10% early withdrawal penalty on earnings if you use the money for educational expenses.

Cons: If you are younger than age 59 ½, you will owe tax on any earnings you withdraw. If you are 59 ½ or older you must have held the account for five years to avoid taxes on earnings you withdraw. The ability to contribute to a Roth IRA is governed by modified adjusted gross income limits.

Read more suggestions in Pros and Cons of College Payment Strategies-Part 2