Getting the Most Out of Student Loans and College Tax Benefits
There are many different types of student loans available. Each has their own benefits and downfalls and it is important that you research thoroughly before deciding on any one type.
The following series of articles analyze the various kinds of loans you can apply for, as well as helpful educational tax breaks and interest rate deductions that may influence your overall school cost. Further, throughout the articles you will find helpful links to private loan lenders, government loan sites, and further information on tax credits.
School Sponsored Loans
Colleges and universities may charge students hefty fees for an education, but they are also one of the biggest contributors of student financial aid. In fact, grants awarded by colleges and universities are the second most common type of aid available to students. Educational institutions give out an estimated 17 billion dollars a year to help students succeed in their academic pursuits.
Usually when a student is granted admission to a college or university, the acceptance letter comes with an offer for financial aid. The document will list the amount of government loans and grants the institution is willing to lend a student, and the money the school itself will pay to have a student attend. In most cases schools decide how much money to give based off of a student's academic and extracurricular potential, and by the income of a student's family. Some institutional aid will provide a full ride scholarship, while others will offer school loans and grants. Each aid package is calculated on an individual basis.
Speak to your institution about financial aid opportunities and make sure to fill out the FAFSA even if you feel you will be guaranteed to receive something from your school. It is better to be safe than sorry.
Back to the TopGovernment Sponsored Loans
The Federal Government is, by far, the largest provider of all student financial aid in the United States. It gives out grants and loans of many different sizes and variations. Probably the most common forms of federal aid are the Stanford and the Perkins Loans. The only way to apply for these loans is by filling out the FAFSA , or Free Application for Federal Student Financial Aid form.
Stafford Loans come in two different forms: subsidized and unsubsidized loans. Subsidized loans are need-based. Interest will not accumulate while you are still in school if you are enrolled at least half-time and there is a grace period and authorized deferment options. Unsubsidized loans are not need-based. You are responsible for all interest that accrues on the loan, including while you are in school. Students, no matter what the financial need, are all given a limit to how much money they are able to borrow in the form of a Stafford Loan.
Perkins Loans are the other most common type of aid given by the federal government. This is a subsidized loan given only to those with the most extreme cases of financial need. Though the federal government is the ultimate lender for a Perkins Loan, colleges and universities are actually the ones that disperse the money to students. Perkins Loans are probably the best loan out there because the interest rate is fixed at 5% and it is completely subsidized. Like the Stafford Loan, the amount of money given through a Perkins Loan is limited.
Parents also have an option for paying for their children's school. The federal government offers a PLUS Loan , or Parent Loan for Undergraduate Students. There is no limit to these parent loans and they are set at a fixed interest rate of 8.5%.
Beyond the world of loans, there are also a few other programs to which the federal government kicks in a little extra help to encourage education. One of these programs is the Federal Work-Study Program (FWS). Under FWS, a college student, no matter what level they are in (undergraduate, professional, or graduate), is able to apply for a job, in which 75% of the salary is paid by the federal government. The other 25% is paid by the employer. This program opens up more jobs and more unique opportunities for students who are financially strapped. Other government funded programs are more specific and are individualized to a student in need; they include a variety of fellowships, internships, grants, and loans, which are all paid for by different agencies within the federal government, but outside of the Department of Education.
Back to the TopPrivately Sponsored Student Loans
Private loans are the most generic form of financial aid because they are available to just about anyone with a decent credit record. Students apply for these loans through private loan providers, such as banks, credit unions, and independent businesses. Another name for these types of loans is Alternative Education Loans because they are not the first type of aid used by students. Since the Federal Government limits the amount of money a student can borrow to fund their education, private loans can be a real asset for students who can't quite meet their tuition bills. Private loans, however, usually come with a higher interest rate than those of government or institutional loans. As a result, students end up paying more in the repayment process.
There are many different types of private loans designed to cater to a student's level of study. Whether a student is in the undergraduate years or doing graduate studies, private loans will often fill in the gaps to finance an education. One type in particular is the GATES Loan . This program is provided by a private non-profit group, which offers a loan in any amount to students with a minimum credit check. GATES loans also offer a very low interest rate for repayment. The loan program is offered through 4-year schools, but not all schools participate. Check with your college financial counselor for more details on the GATES loan.
Other popular private loans that are worth checking out include:
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Student Loan Tax Credits
The government supports a majority of students, mainly through special, low-interest loans. There is also the opportunity, however, for students and parents to receive extra tax credits, which can be deducted from yearly taxes owed.
One of these special tax breaks is the Hope Scholarship Tax Credit . This provides students, parents, guardians, and families with a tax credit claim for up to $1,500 a year. The money must be spent on college tuition, whether it is for themselves or for a child. This credit can be used during the first two years of any undergraduate study, and is limited to households making less than $100,000 a year.
Keep in mind, the Hope Scholarship Tax Credit is calculated on a per student basis. Therefore, the maximum available credit will vary with the number of students in the family.
There is also the Lifetime Learning Tax Credit . This allows students and families to claim and deduct up to 20 percent of the money they spend on tuition every year. There is no time limitation for the Lifetime Learning Tax Credit and it can be used for tuition paid to an undergraduate or a graduate program. Like the Hope Scholarship Tax Credit, the Lifetime Learning Tax Credit is limited to only those with a household income less than $100,000.
Also, unlike the Hope Scholarship Tax Credit, the Lifetime Learning Tax Credit is calculated by family. The maximum credit, therefore, will not vary. Further, there is no limit to the number of years in which the Lifetime Learning Tax Credit can be claimed. The individual must simply continue to meet the income and institution requirements.
Article Resources:
IRSH&R Block
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Student Loan Tax Deductions
Like homeowners, students can take advantage of deducting the interest they pay on their student loans. There are many different types of loans, each with their own interest rate and pay-back rules, but the interest that accumulates on any loan designated for students, be it a private, government or institutional, can be deducted from income taxes. The maximum amount that can be deducted as student loan interest is $2,500 a year, and that number is cut down exponentially for single taxpayers making over $50,000 a year.
Beyond the standard loan interest deduction, students who are paying their way through school can also deduct up to $30,000 of tuition expenses from their taxable income. This policy is not limited to any income bracket. Also, working adults who take classes, which are paid for by their employer, can exclude any tuition assistance (up to $5,250) that their employer provides from their taxable income.
Talk to your school's financial aid office to find out more on these opportunities.
Article Resources:
IRSBankrate.com
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