This is Josh Cohen draw again with lesson number 14. paying for college. Parent income and savings is the largest funding source. This is according to the 2015. Sallie Mae report about how America pays for college. If you look at this chart, you will see that only for four year private colleges is when this fact is not true any more. Genuine scholarships are indeed offered by private colleges.

But as always, we must be aware of tuition discounts offered by private colleges after they artificially inflate the cost of attendance and then make families believe that they earned a scholarship So how do we pay for college? Well, there are four important ways. prepaid tuition plans. They're also called 509 tuition plans. These allow parents and grandparents and other well wishers of a child to prepay tuition at today's tuition rates at eligible public and private colleges or universities. You or your child must be a resident of the state offering the plan when you apply.

You don't have to be a resident of the state when the child goes to college portability may be limited to the weighted average tuition and mandatory fees. And obviously, this doesn't apply to room and board. Essentially what you're doing here is that you pay a certain amount every month for a certain period of time, and your state will automatically guarantee tuition credits for your child when your child is ready to go to college. This is a very effective way To save for college if you know for a fact that your child will attend an institution within the state. Next up are the college savings plans the traditional 529 and we have separate slides for that. So we will come to those in a second.

Next there are education savings accounts. And unlike 509 plans, which we will discuss in a moment, your investment options are virtually limitless meaning you can invest in any vehicle that you choose the maximum contribution is $2,000 per beneficiary from all sources. This is an important point that if you and your father are both investing for the child, your combined investment for the child cannot exceed $2,000. There are of course income caps as well. The next Option is college savings bonds. The Series II bonds any interest earned is 100% deductible if used for qualifying educational expenses and interest earned is generally not taxed by the state as well.

But there are strict income limitations, your modified adjusted gross income cannot exceed $146,300 and it is a fairly complicated investment vehicle so check with your tax advisor. Now we'll come to the traditional 529 College plans which are very popular starting a plan like that will let you grow college money on a pre tax basis. Note, however, that when you contribute money to a 529 plan, that money is not deductible. earnings are not subject to federal tax and generally they're not subject to state tax when used for the question. ified education expenses of the child such as tuition, fees, books, room and board, computers, and so on capital gains from these plans are also free of all federal taxes. So think of this as an education IRA.

So let's run through some important questions that we are often asked about 500 nights. So are there state residency requirements? No. Generally you can invest in any state plan that you wish. Are these college savings plans guaranteed by states? No.

You could lose money in your investment and the state is not responsible for your loss or their fees. Generally, yes, these are charged by the mutual fund companies which run the state 529 plans. How often can you change the investment makes no more than twice a year. This is by federal law. What restrictions apply to withdrawals as long as you use your 5% and account for qualified higher education expenses, earnings in the 529 account are not subjected to federal income tax in and in most cases, state income taxes. However, if 500 and account withdrawals are not used for qualified higher education expenses, they will be subject to both state and federal income taxes and an additional 10% federal tax penalty on earnings.

As we said, this is very similar to an IRA. Does investing in a 529 plan impact financial aid eligibility? Yes, investing will generally impact a student's eligibility to receive need based financial aid. And this makes sense because for many families who do not have the ability to save a large part of the financial aid package is in loads. So the more you can save for college, the less debt you are you student may have to incur during college and that is a good thing. We thank green accounting and tax calm for this slide.

But what is the difference between a tax credit and a deduction? $1,000 tax credit in any bracket saves you $1,000 in taxes, but deduction is one where your income is reduced by the amount. So it depends on your tax bracket. If you're in a 28% tax bracket, you save $280 in taxes so tax credits are better than tax deductions. So how do you pay for college? Well, there are many important tax credits and deductions that you could claim this is the government giving you money back the most popular is the L See, which is the Lifetime Learning credit.

This is a direct cash back to you $2,000 every year and it applies to anybody who has an income of $110,000 or less. The American Opportunity Tax Credit is a little more generous in the sense that the benefit is higher and the income cap is higher as well. However, this credit only applies to those who study for four years at an undergrad institution. Tuition and fees deduction This is a deduction which is as we said different from a credit but you can deduct up to $4,000. In college expenses devoted to tuition and fees. The income cap is $160,000.

You cannot claim meals and living expenses. student loan interest deduction this tool is a deduction $2,500 in interest expense As may be deducted on your federal tax returns, there is no income cap for this benefit. Even those who do not itemize their deductions on their federal tax returns can claim this deduction. The best way to verify your eligibility for credits and deductions is to use the free IRS interactive tax assistant to you just answer a few questions and the tool will tell you which deduction or credit you qualify for. So the key takeaways from this lesson are that parental contribution is an important component of college financial planning. So it helps to begin to save early when children are still young.

Many families do not take full advantage of various deductions and credits. This is like throwing money away. We have spent a lot of time learning about how to lower costs by Borrowing as less money as possible is still the best way to pay for college. If you have any questions, please let us know. Thank you