Parents Paying for College: What Are My Options?

With college getting more expensive every year, here are some things to consider when choosing financial vehicles that can finance a college education.

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Should I try to give any of my S corporation stock to my children to pay for their educations?

If you have an S corporation, giving your children stock in the corporation can be an excellent way to help finance their college educations. This is because of how S corporations work. S corporation earnings are not taxed at the corporate level; instead, profits are passed to the shareholders, based on their ownership, as taxable dividends. Generally, minor children should not own the stock directly. Rather, the shares should be owned through a guardian or custodial relationship or by a qualified S corporation trust.

Give your children only non-voting shares of stock if you want to retain control of the S corporation.

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Does it make sense to borrow against my life insurance policy to fund a college education?

It can make sense because the rate on a policy loan is likely to be lower than you might otherwise be able to obtain. And you don’t have to go through an application process. Before you take out a policy loan, however, be sure to consider your long-term life insurance needs. And be careful that you do not inadvertently borrow so much money that the insurance company decides to terminate the policy. That could sock you with an unexpected and large capital gain tax.

What is the expected family contribution (EFC)?

The expected family contribution (EFC) is a key factor that determines whether your teenager can receive college financial aid.

Your EFC takes into account your family income, savings and other factors. As a general rule, you as parents are expected to contribute about 6% of your savings toward your child’s education, and your child is expected to use about 35% of his or her savings for college. Your EFC is compared to the cost of attending the college your child has selected to determine financial aid eligibility.For more information, check this Department of Education page or the department’s Student Guide Web site.

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Do I have to pay income tax on my summer job when I’m going to college?

You probably won’t make enough during the summer to owe any income taxes, in which case you don’t need to have any taxes withheld from your paycheck. You can skip income tax withholding altogether – and get more money now to help with school – if you didn’t owe any tax the previous year and you don’t expect to owe any this year. Ask your employer for a new W-4 form and write the word “exempt” on the line indicated.

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Is a work-study program a grant?

The federal work-study program isn’t really a grant, but it isn’t a loan, either.

You are given an opportunity to work – often on campus – to help pay your school expenses. Work-study programs are administered by the college aid office and are usually open to both middle-income and low-income students. You work at the job until the full reward, say, $1,200, is earned, and then the job is over. However, you may be able to qualify for another work-study job. Work-study programs can provide you with valuable work experience as well as cash.

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Can I borrow money from my children to help them pay for college?

Borrowing from your child is an offbeat way to finance a college education.

But it can work, and it may provide some valuable tax breaks. If your child has money which he or she inherited or earned, you can borrow it at fair interest rates and use the funds for his education. You may be able to deduct the interest you pay to your child, subject to investment interest rule limitations, and your child pays tax on the interest at potentially lower income tax rates.For this to work, you must have a legal obligation to repay the loan, and you and the child must have a written agreement or note.

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My daughter is going to be a freshman in college. Should I pay for all four years up front?

If she has selected a college or university, the school may let you pay for all four or five years of education up front. The school gets their money all at once; you get protection from rising tuition costs. Even if tuition goes up, you won’t have to come up with more cash. These programs can be a good deal if you can afford to pay for your child’s full education all at once.

Read the plan’s fine print, however, and make sure your child is serious about completing school. Under some plans, the college keeps some or all of the money if your child drops out or transfers to another school.

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Does it make sense to refinance a mortgage to pay for college?

Refinancing your mortgage to pay for college can make sense. If you get a lower interest rate, you can lower your monthly payments, thus freeing up money for college. Or, you can increase your mortgage to pay college costs. This lets you finance college expenses with a tax-deductible loan, make monthly payments over a longer period of time, and have a disciplined payment structure.

On the other hand, you reduce the equity in your home. And if you take out enough for four years of college, you will pay interest on some of the money before you need it. Depending on your situation, a home equity line of credit may be better.

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Can I pay college tuition and other expenses on a monthly payment plans?

You might be able to pay college expenses monthly. More colleges and universities are allowing payment plans for tuition, fees, books, and room and board. You generally pay an extra fee, and then your monthly payments are prorated for projected annual expenses. Check with the college registrar’s office, or read the financial aid materials in the college’s application packets.

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If I pay someone else’s tuition or medical bills, will I have to pay gift tax?

Not if you do it right. Be sure to pay the institution directly, and your generous help won’t count toward the annual gift-tax exclusion or mean you have to file a gift tax return.