How to help your child prepare f

Academic Preparation

Parents can begin to prepare their children for college early by:

helping them take the right junior high and high school courses based on the type of school they wish to enroll in after high school;

encouraging

them to maintain good grades throughout their high school experience;

helping them obtain and complete admissions applications;

assisting them with essays and preparing for admissions interviews;

helping them decide on the right school by researching the school's curriculum, the size of the school, the type of school, and a school's affordability. Parents should also encourage campus visits.

Home Schooling

The first important thing is to have your homeschooled child contact the admissions offices at the colleges that interest him or her.

Different colleges have different requirements for homeschooled students, so be prepared to tailor the application package for each school. Most admissions offices will be interested in the level and intensity of the course work your child has completed. Be sure to find out whether the college requires a transcript of completed courses. Sometimes, colleges request a list of the books used and any completed course materials. Your child's GPA will probably not matter as much as factors such as college entrance exam scores, personal essays, and interviews.

Many colleges find it useful to have a portfolio of the homeschooled student's work. In addition to information such as grades and test scores, the portfolio might include writing samples, computer programming projects, awards, lists of books read, newspaper clippings about volunteer work, etc.

In addition, your child might want to consider enrolling at a local community college. Some homeschoolers find community college a good way to "try out" a college environment and to build a record of courses and grades beyond the home transcript.

You and your child can learn more through networking with other homeschoolers who are applying ? or have been admitted ? to college.

Financial Preparation -- Saving

You should begin saving as early as possible. The average in-state tuition and fees for full-time undergraduate students for 2000-01, before student financial aid was deducted, was $1,360 for a public two-year college and $3,980 for a four-year public university. Private four-year schools averaged $15,530 in 2000-01. (Source: National Center for Education Statistics, Higher Education General Information Survey.)

Many state governments now offer innovative college savings programs. The College Savings Plans Network (an affiliate of the National Association of State Treasurers) provides information about these plans and links from their Web site to the many state plans.

FinAid, an online financial aid resource, has a number of online savings calculators to help plan your savings and project your financial returns. They also can help you project college costs and student loan payments.

Tax Benefits and Prepaid Tuition Plans

For more information on ways to help finance your child's education, including an education IRA, click here.

Borrowing

Another funding option is the Federal PLUS Loan program. Click here to visit the Funding section of our site, where we describe PLUS Loans as well as other federal loans, grants, and work-study.

Other borrowing options involve leveraging personal investments or your home's equity.

More and more students and parents are using private loans or credit cards to finance postsecondary education. Because these types of consumer debt usually carry far higher interest rates than federal student loans, you should consider them a last resort. For information about sources of federal, state, and private financial aid, visit our Looking for Student Aid page.

College Savings Calculator

Use this handy calculator to determine how much you could or should be saving to meet college expenses, and how to maximize your savings efforts.

What about tax incentives for Education-related Expenses?

Hope Scholarship Credit (HSC)

Tax credit up to $1,500/year for each student

100 percent tax credit for the first $1,000 paid for qualified expenses. 50% tax credit for the second $1,000.

You may claim HSC for two years. Student must be in first or second year and enrolled at least half time for one period of the tax year.

Covers tuition and fees.

You qualify by paying tuition and fees for yourself (if independent), your spouse, or your dependent child.

Student activity fees, athletic fees and other expenses do not count toward your credit.

Grants and scholarships will reduce the tuition and fees used to determine your credit.

Eligibility decreases for modified adjusted gross incomes (AGIs) between $40,000 -- $50,000 (filing single) and $80,000 -- $100,000 (married, filing jointly). Cannot claim with modified AGIs above these limits.

You benefit from tax credits only to the extent you owe federal income tax. If you don't owe taxes, you won't receive a tax credit.

Lifetime Learning Credit (LLC)

May save you up to $1,000/year in federal taxes.

20 percent tax credit for the first $5,000 paid for qualified expenses. After 2002, a 20% tax credit on the first $10,000 paid.

No limit on number of tax years you may claim LLC.

Covers tuition and fees.

Available to college juniors, seniors, graduate and professional students -- and to students taking individual classes to improve job skills

You qualify by paying tuition and fees for yourself (if independent), your spouse, or your dependent child.

Student activity fees, athletic fees and other expenses do not count toward your credit.

Grants and scholarships will reduce the tuition and fees used to determine your credit.

Eligibility decreases for modified adjusted gross incomes between $40,000 - $50,000 (filing single) and $80,000 -- $100,000 (married, filing jointly). Cannot claim with modified AGIs above these limits.

You benefit from tax credits only to the extent you owe federal income tax. If you don't owe taxes, you won't receive a tax credit.

Education IRAs

You may deposit up to $500/year into an IRA for a child under age 18.

Parents, grandparents, other family members, friends, and the child may contribute to the IRA as long as the total contribution per year does not exceed $500.

Eligibility to contribute is reduced with a modified adjusted gross income between $95,000 -- $110,000 (filing single) and $150,000 -- $160,000 (married, filing jointly). Cannot contribute if income is above these amounts.

IRA grows tax-free until distributed. A child will not owe tax on any IRA withdrawal if the child's expenses at the institution equal or exceed the amount withdrawn.

NOTE: You can only claim one tax credit or contribute to one education IRA per student per tax year.

Student loan interest deduction

Parents and independent students may deduct interest on loans borrowed to meet college expenses

Deduction is for interest payments made during the first 60 months (5 years) in which interest payments are required.

Deduction diminishes for modified gross income between $40,000 -- $55,000 (single filers) and $60,000 -- $75,000 (married, filing jointly). Cannot deduct if income is above these amounts.

Maximum deduction in 1999, $1,500; in 2000, $2,000; 2001 and beyond, $2,500.

You are not required to itemize to receive the deduction.

Dependents may not claim the deduction.

Married couples must file jointly to receive the deduction.

Using IRA withdrawals for college costs

You may withdraw from an IRA to pay higher education expenses for yourself, your spouse, your child or grandchild.

You will owe federal income tax on the amount withdrawn, but will not be subject to the 10% early withdrawal penalty.

The Federal PLUS loan vs Home Equity Loans

Using a home equity loan to help pay college costs has been a popular option, since the interest is tax deductible. However, many families would rather have the peace of mind of not putting their house on the line to pay for college.

If you are considering using your home equity to pay for college instead of a PLUS Loan, be sure to consider these points:

Interest Cap: Many home equity loans have very high interest rate caps, which means that if interest rates were to rise, a home equity loan could become a very expensive option -- even with the tax advantage.

Liquidity: Parents who hold on to their equity have the peace of mind of preserving their liquidity; they have the funds available for emergencies as well as opportunities.

Insurance: Unlike most home equity loans, the PLUS Loan is fully insured against death and disability and payments can be deferred during times of financial difficulty.

These questions can further help you evaluate the PLUS Loan vs. a home equity loan:

What is the interest cap on my equity line? Many home equity loans have very high interest rate caps.

Do I have enough equity available to cover all four years and all of my children? Many parents don't, and that's why they are taking advantage of the PLUS Loan now while the terms are so favorable.

Would my equity loan be fully insured? Is it forgiven in the event of death of the parent and/or student or the total disability of the parent? Does it contain a payment deferment or forbearance clause for times of economic difficulty, like the PLUS does?

Am I carrying any debt above 9 percent? Most parents in this situation use the PLUS to pay for school, which frees up other monies (equity, for example) to pay off more expensive debts. Nobody wants to be in debt, but taking out a 9 percent loan is far better than carrying a credit card balance at 17 or 18 percent.

The Federal PLUS Loan vs Cashing Investments

Some parents cash in investments because they'd rather not borrow. Initially, this seems to make sense. However, parents soon realize that this could be one of the most expensive ways to pay - especially if it causes them to underfund a pretax retirement plan or to cash in an investment that is earning a solid return.

Parents considering using investments instead of a PLUS Loan for education costs should consider the following:

Retirement: Underfunding tax-deferred retirement plans to fund education is the most costly alternative, due to the loss of significant tax benefits. For most parents, the tax savings of a retirement plan far outweigh the interest expense of the PLUS Loan. For example, a parent in a 25% tax bracket that invests $4,000 in a pretax retirement plan will save $1,000 in taxes plus gain the returns on that money.

Liquidity: If investments are used to pay for college, the liquidity is no longer available for emergencies -- or opportunities -- as they arise.

Return on Investment: By cashing in investments, parents lose any future returns on that money.

It is important for parents to ask themselves the following questions when comparing the PLUS Loan with cashing in their investments:

What kind of return am I getting on my investment? If the return on investment is higher than the current PLUS interest rate, then it makes sense to keep your money invested. For example, if the current interest rate is 7.72%, you are earning 15% off your investments, and you keep that money invested and take out a PLUS Loan to pay for the college instead, then you are gaining 15 percent while paying 7.72 percent. That's a net profit of over 7 percent!

Do I have enough money in the stock market to cover all four years and each of my children? Many parents don't -- and that's why they are taking advantage of PLUS Loans now while the terms are so favorable.

If I sell my investments, what kind of tax exposure (capital gains or regular income taxes) will I have?

Am I carrying any debt above 9 percent? Most parents in this situation use the PLUS to pay for school, which frees up money to pay off more expensive debts.

The Federal PLUS Loan vs Using 401K Funds

Real-Life Example

Let's say you had a 4O1K account of $100,000. If you keep that money in your 4O1K and it earns 12 percent, over three years your account would gain $40,492.

If you withdrew $20,000 for education expenses, your gain over three years would be just $12,394 -- a difference of $28,098.

This equates to a 28% loss in earnings on a tax-deferred basis (compounding the loss). In addition, the $20,000 must be replaced from income, usually within 5 years at $4,000 per year, equaling $333 per month. The PLUS Loan payment on $20,000 is only $245 a month, with no prepayment penalty!