Tax Tip: Relieve financial burden of college with tax benefits
The Consumer Financial Protection Bureau estimates that student loan debt reached $1.2 trillion last summer. That is an 84-percent increase since 2008. After college, the average student loan debt is $29,000. It would take 15 years of monthly payments of $161.11 just to repay the principal. With an interest rate of 3.25 percent, that monthly payment increases to more than $200.
What are students and parents to do? With annual prices for undergraduate tuition, including room and board, rising 78.5 percent at public universities over the last 10 years, how can they relieve the financial burden of college? Believe it or not, taxes can help.
Start early, start smart
If a student hasn’t yet reached college, now is the time to start saving for higher education expenses. Tax-advantaged plans like qualified tuition plans and Coverdell accounts can grow tax free. Qualified tuition plans, also known as 529 accounts, also may have state income tax benefits, like contribution deductions. Compare available state tax benefits here. Parents, grandparents and even unrelated people can contribute to these accounts for future college students.
Right here, right now
In college right now? The American Opportunity Credit, up to $2,500, is for students or their parents who pay tuition and fees and buy course materials for the first four years of college. This credit covers the cost of books, which is important to students facing textbook inflation of 812 percent over the last 30 years.
The Lifetime Learning Credit, up to $2,000, is for students or their parents who pay education expenses, such as tuition and fees. Students do not need to pursue a degree to claim this credit, so someone acquiring or improving their job skills through an eligible educational institution may use it. More detailed eligibility requirements relate to a taxpayer’s income and filing status.
It’s never too late
If a taxpayer already has student loan debt, there is no need to worry. The tax code helps taxpayers repaying their debt. Taxpayers can deduct up to $2,500 of interest paid on their student loans each year, even if the payment is voluntary. The more interest paid, the larger the deduction taxpayers can claim up to the maximum. Because this deduction does not require a taxpayer to itemize their deductions, anyone can take it. But income and filing status restrictions, as well as other loan and borrower information, may prohibit some taxpayers from claiming this deduction.
According to Georgetown University’s Center on Education and the Workforce, 65 percent of new jobs will require a college education by 2020. But equipping students with the education they need to succeed in our new economy doesn’t mean they have to take on loads of debt. There may not be a single debt-eliminating silver bullet, but savvy tax and savings planning can help students get a college education with less debt.