Do's and Don'ts for Handling College Tuition

If you have a child headed toward college, you probably won’t be surprised to learn that tuition costs rise faster than the average inflation rate.

During the last 10 years, in-state tuition rates at four-year public universities increased an average of 3.5 percent per year beyond the average inflation rate, according to the College Board, and an average of 2.4 percent beyond inflation at four-year private colleges.

So it’s especially important to take advantage of every opportunity available to reduce higher education costs. The California Society of CPAs (CalCPA.org) offers these tips on keeping your expenses down.

Don’t Forget Tax Credits

Two tax credits in particular help qualifying families lower their out-of-pocket college costs. The American Opportunity Tax Credit, which is available for the first four-years of post-secondary education, is a credit of up to $2,500 of the cost of college tuition, fees and course materials paid during a taxable year.

As a refundable credit, it reduces the amount of tax you owe on a dollar-for-dollar basis. If the amount of the credit for which you're eligible exceeds your tax liability, the excess will be refunded to you up to the lesser of 40 percent of the credit or $1,000.

Through the Lifetime Learning Credit, qualifying taxpayers can receive a credit of up to $2,000 a year to cover tuition and fees for all years of post-secondary education and for courses to gain or improve job skills.

Your CPA can offer more details about these credits and other potential education-related tax-planning opportunities.

Do Fill Out a FAFSA

Are you convinced your income is too high for your student to qualify for federal grants? Remember that every student’s situation is different, and colleges use a variety of approaches to determine who will receive aid.

It’s therefore a good idea to file the Free Application for Federal Student Aid, or FAFSA, form required for financial aid consideration. The form is also often used to determine eligibility for other kinds of scholarships and grants, and qualifies the student for low-interest student loans.

Be sure to file early—as soon as possible after the form becomes available on October 1—because some states award grants on a first-come, first-served basis until the money runs out.

Don’t Overlook Increases

Tuition costs will likely continue to rise, so be sure to budget potential annual increases into your college planning. Creating a budget, and finding ways to stick to it, can help ensure your overall college costs don’t increase significantly each year.

Don’t Raid Your Retirement Funds

You’ve got a nice retirement nest egg already set aside, so why not use it for college costs?

There are a number of good reasons. Parents of college-age children are typically in their 40s or 50s, a time when they should be adding as much as possible to their retirement accounts, not draining them.

And while you may not want to saddle your child with a student loan, that debt can be paid off over time, but getting a loan to cover retirement expenses is not really a good option.

Instead, you may end up postponing retirement, finding a job to supplement your savings after you retire, or making big cuts in your retirement budget. Before you raid your retirement funds, investigate low-interest student loans or consider the benefits of a less expensive college.

Don’t Fail to Plan

Beyond starting to save as early as possible, college planning means making other efforts to sort out the financial management aspects of a college education, including figuring out how much you can afford, researching institutions, and considering community college for your basic credits.

In addition, before your student begins applying to colleges, talk to them about how much you expect them to contribute financially so there are no surprises—or disappointments—later.

Consult Your CPA

Want more advice on the best ways to keep the lid on college spending? Your local CPA can help. Turn to him or her for customized, expert advice for all your financial questions. To find one near you, visit Find a CPA

Copyright 2017 American Institute of Certified Public Accountants.

The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession’s nationwide 360 Degrees of Financial Literacy program.