Financial Aid and Tax Benefits

In today’s economy, the cost of college is very high on the list of expenses. How does one determine the cost of a year of tuition? Typically, the school’s tuition and fees, room and board, meals, books and supplies, personal expenses and transportation expenses determine it.

Put together, this is the total cost to attend any given college or university for one academic year. Some students may have additional expenses such as medical care or costs arising from disabilities.

While the cost of college does increase each year, this should not scare you or your parents away from your educational goals. Financial aid is available to almost every student and his or her families regardless of the type of school the student is interested in attending.

Most students are eligible for some type of financial aid. For example, Minnesota students and families received almost $1.9 billion in financial aid during the 2005-2006 academic years. Where does this money come from? The money comes from the state of Minnesota and the federal government, colleges, and private sources. So, the funds are out there in every state to help with financial aid.

It is also important to remember, there could be huge tax benefits and deductions that make what families do have to pay more manageable.

The federal government does offer several tax benefits for pursuing a college education including tax credits, tax deductions, and exclusions from gross income. For Example:

Hope Tax Credit: The ability to claim a federal individual income tax credit of up to $1,650 for qualified tuition and related expenses for each eligible student.

• Lifetime Learning Tax Credit: Claiming a federal individual income tax credit of 20 percent of the first $10,000 of qualified and related expenses you pay for your family.
• Tuition and Fees Deduction: Deducting qualified tuition and related expenses even if you do not itemize deductions on Schedule A, Form 1040.
• Student Loan Interest Deduction: Deducting up to $2,500 of the interest you paid on student loans on your federal individual income tax return.
• Employer Provided Educational Assistance: You can receive up to $5,250 in tax-free education benefits from your employer each year.
• Cover dell Education Savings Account: Earnings grow tax-free until withdrawn to pay for qualified educational expenses.
• Qualified tuition Program: Earnings are tax-free while invested and tax exempt when withdrawn for qualified higher education expenses.

There are other tax provisions that may help your family cover the cost of higher education as well. Such as:

• Grants and scholarships are usually excluded when calculating the gross income of the student.
• If an individual receives debt forgiveness following graduation, the recipient does not have to report the amount of the forgiveness as income in certain cases.
• If a college or university reduces the tuition charged or pays the tuition of the immediate family of an employee, that tuition reduction or tuition payment does not count as income.

Also, keep the following in mind as you explore education tax benefits. The definitions of qualified college costs differ. This means that although one savings or investment option can be used to pay the cost of books or room and board, another might not allow it. Each tax benefit option has different phase-in and phase-out periods as well as varying income eligibility requirements. Also, some tax provisions cannot be used together in the same tax year, so families may need to choose between incentives.