Pencils, notebooks, planners, and binders are making their
way into the seasonal “Back-to-School” section of retail stores as you read this. The collegiate academic calendar
kicks off in just a few short weeks with the start of the fall semester. For students, that means getting back into
the routine of class, study sessions, campus dining hall hours, and
homework. For some parents, the deadline
is approaching to make the first payment on tuition for the 2014-2015 school
While the importance of children earning a college degree is
important for most parents, recent articles
have sparked questions about whether or not parents should pay for college. Some
contend that it is the parents’ responsibility to pay for college so that
children do not start adulthood with crippling debt. Others argue that teaching
the keys to financial success begins with teaching children to pay for their
own college expenses. The decision on whether or not parents should pay for
college begins with evaluating needs, looking at financial options, and
exploring the benefits and opportunities of each education payment option for
Start By Finding Out How Much College Costs
How much does it really cost to get an education? The first step in deciding whether or not to pay for student
loans as a parent is to evaluate borrowing needs. The financial aid office at the college or University is a great
place to find out this information. If
the student doesn’t already have a FAFSA filled out, it is important to file
one so that the any remaining federal aid can be used to accurately calculate
how much is needed. Openly discuss the state of financial need with the college
or university’s financial aid office directly to see if there are any
additional funds or scholarships that the institution offers outside of federal
- Add up estimated tuition, books, housing (either
on campus, off-campus, or living at home), food, and entertainment.
- Subtract any federal aid. This could be in the
form of grants or loans issued to the student, not to the parent.
- Subtract scholarships, grants, or wages from
anticipated work-study programs.
After you discover the remaining amount, it’s time to look
at financing options.
The most common way parents pay for college is by taking out
a Parent PLUS Loan. These are specific loans from Federal programs that are
taken out in the parent’s name, making the parent 100% responsible for the
Additionally, parents may go to a bank or financial
institution and apply for a private student loan as well. As with the Parent
PLUS Loan, this loan is in the parent’s name and the parent is held responsible
for the entire debt.
One higher risk way that parents fund a college education
for their children is to take out a home equity loans.
Tax and Financial Benefits of Each Type of Education Loan
Parent PLUS Loans typically come at lower or comparable
interest rates than private loans. Because home equity loans are secured
against your home and interest rates are currently low, they may offer a better
interest rate than the Parent PLUS or private loans for the short-term.
If parents take out either a Parent PLUS Loan or a private
loan, the parent
can deduct up to $2,500 of interest paid.
This tax benefit can only be claimed if payments on
the principal and interest are made to pay back the loan(it cannot be
taken without making payments), making this a long-term benefit of a Parent
PLUS loan or private education loan.
Interest on a Home Equity loan is tax deductible as regular
mortgage interest for those who itemize their deductions. Eligibility for these deductions has certain restrictions
and limitations. Before securing a home
equity loan to pay for college, it’s important to talk with a tax
professionalto explore your eligibility for benefits.
Each option has its own short and long-term benefits, but it
is also important to consider the many caveats of each option.
Caveats to Education Financing Options
The biggest downside to parents taking out loans to pay for
their child’s education is repayment.
For most lenders, parents are only eligible to pay back the loan through
standard repayment plans. If parents borrow student loans, they won’t get any
relief from any of the federal student loan forgiveness options. They also do not have the option for budget-friendly repayment plans like the income-based or pay-as-you-earn programs that students are eligible for. They won’t have very
much flexibility outside of their lender’s standard repayment terms.
Home Equity Loans are even less flexible and higher
risk. The debt is attached to the house,
which may further complicate matters if the parents decide to sell the home With no deferment or grace period, there is no chance to wait until the student graduates or attends school less
What Alternatives Do Parents Have to Financing Their Child’s Education?
Students can take out student loans in their own names to
get better repayment options and even work toward student loan
forgiveness. That way, students are 100%
responsible for their education loan debts as far as credit goes.
Students can also take a look at more affordable higher
education options. One of these options
is to attend Community College (which typically offer more affordable rates) to
complete general education requirements (and a few courses related to their
desired field) and then transfer to a 4-year college or university. Some
schools have Guaranteed Admissions Agreements between community colleges and
universities. In Virginia, if a student
graduates from any one of Virginia’s 23 community colleges with an Associate’s
Degree and meets a certain grade point average requirement, he or she will be
guaranteed admission into a Virginia College or University. Select schools in
California, Connecticut, and Washington offer various Transfer Agreement
options similar to the ones in Virginia.
Contact the schools in your area to see if this option is offered.
To fulfill the need to offer assistance with their child's education, parents can also offer to help
pay for some of those payments on a monthly basis. One parent in the eSmart Tax Community even
suggested using financial help as an incentive for students to get good
grades. For example, if Dorothy
graduated within 4 years with a 3.6 GPA or better, Dorothy’s mother would pay 50%
of Dorothy’s student loans over ten years.
However you decide to handle your child’s education expenses
this upcoming August, maximize your tax benefits by making smart money moves.
For more information on how eSmart Tax can help you make smart decisions about
your finances every day, visit
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Disclaimer: The Daily Deduction is a knowledge
source for industry news and related tax topics. We take every effort to provide you with
accurate tax information, but this information should not be a substitute for
professional tax advice. Find a Liberty Tax
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