Paying for College: Take Advantage of Tax Breaks When Financing College

Paying for college is a financially challenging time for many young people, especially as it’s often their first time away from the parental home. It’s important to understand how private and federal student loans can be used to bridge the gap between savings and educational costs. A recent National Post-secondary Student Aid study recently revealed that the average amount owed by graduating seniors following a 4-year degree course was $23,186. It is useful to identify any tax relief that can be used to minimise student loan debt as it cannot be written off in the same way as other unsecured loans.

Paying for College with a Federal Student Loan

  • Perkins student loan. A means tested loan for college that is only available to undergraduates in the greatest financial need. The interest rate is currently fixed at just 5% and will be paid by the federal government during college and for a 9-month grace period after graduation. Applications should be made directly to the schools financial aid office.
  • Stafford student loan. Either subsidized or unsubsidized, the Stafford loan is by far the most common way students use to pay for college. Two-thirds of subsidized loans are offered to families with an AGI of under $50,000. The Free Application for Federal Student Aid (FAFSA) must be submitted directly to the relevant government department. Repayments begin 6 months after graduation.
  • PLUS loans. A parent can borrow money to help their son or daughter with college financing (course fees, housing, books etc. A good credit rating is required.

Pay for College with a Private Student Loan

A loan for college from a bank is regularly opted for when a federal student loan isn’t sufficient to cover tuition fees, accommodation and living costs. Although less paperwork is normally involved, the rate of interest is typically higher. Unlike Perkins and Stafford loans, a private student loan will only be offered to students (or cosigners) with an excellent credit rating. Each financial institution has its own lending criteria so it is important to check all the specifics with each lender.

Tax Breaks to Help with the Cost of College

The American Opportunity Tax Credit can help reduce a tax bill by up to $2,500. In order to claim this, it is necessary to demonstrate that at least $3,000 has been paid towards eligible college expenses. A higher income limit means that more people will now be able to qualify. Single and married filers can now earn up to $80,000 and $160,000 per annum, respectively.

The Challenge of Financing College

Most people who attend university will need to borrow money for tuition fees, housing and living expenses. Almost two-thirds of 4-year undergraduate students will need to take out a private or federal student loan. In the event of financial difficulties or unemployment after graduation, it may be possible to defer repayments for up to 3 years. Unless a Perkins loan, interest will continue to accrue. However, this represents a better alternative than defaulting so always keep in touch with the lender.