Tax guide

Other Ways to Pay for College

While student loans and educational savings accounts are the most common ways to finance higher education, there are a couple of other options you may want to consider.

U.S. Savings Bonds

Generally, you have to pay tax on the interest you earn from U.S. savings bonds. It’s payable either in the year the interest is earned, or in the year the bonds are cashed. But when you cash in a savings bond under an education savings bond program, you might be able to exclude the interest from taxable income. You must meet these conditions:

  • You must pay qualifying education expenses for yourself, your spouse or a dependent.
  • Your modified adjusted gross income (MAGI) must be less than the amount specified for your filing status. For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal tax returns without taking into account this interest exclusion.
  • Your filing status must not be married filing separately.

In order for the bond itself to qualify, the owner must be at least 24 years old before the bond’s issue date printed on the front.

What can the savings bond interest pay for? Tuition and fees, contributions to a Coverdell Education Savings Account (ESA) or to a Qualified Tuition Program (such as a 529 plan). The IRS says you’ll have to deduct any tax-free benefits you’ve received, such as scholarships, VA benefits and 529 plan distributions before figuring how much savings bond interest can be designated tax free.

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Borrowing from an IRA

Another strategy is to borrow from an IRA to pay all or part of college expenses. While the rules allow this, be warned that this could set your retirement fund back and have hidden costs. On the other hand, if paid back within the five years allowed, the impact on retirement could be low.

The pro-loan camp touts the convenience of a IRA plan loan, which is actually a loan to yourself, so it doesn’t involve a credit check. Many times, you can set up such a loan online with the plan’s financial institution. Loan costs are modest – some plans only charge a small administration fee.

Bur remember that the key to a successful loan is that you can pay the loan back into your IRA in time to avoid penalty.

Also see:
Saving for College? Here’s the Plan
Coverdell Education Savings Accounts

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