Tax Strategies

How you and your parents fill out your tax forms makes all the difference in how much aid you receive. A good plan for paying for college focuses on minimizing the income and assets you report during the year before you start college.

Education Tax Credits
    You or your parents may qualify for one of the following two programs created with the Taxpayer Relief Act of 1997:
  • $1,500 Hope Credit. During your first two years of college, your parents will get a 100 percent tax credit for the initial $1,000 of your tuition and a 50 percent credit for the next $1,000. This credit is phased out for joint filers earning between $83,000 and $103,000, or single filers earning between $41,000 and $51,000.
  • $2,000 Lifetime Learning Credit. This amount represents a 20 percent tax credit for the first $10,000 of your tuition. There is no two-year limit, and your parents can claim this credit even when you go to graduate school. The same income levels as the Hope Scholarship apply.

Visit www.irs.gov and download form 8863 for details.

Student Income Protection

In the game of financial aid, student income is assessed more harshly because students typically do not need the majority of their earnings to pay for household needs, such as food and shelter. To maximize financial aid, your parents should never put assets in your name.

Student income has a $2,380 protection, and anything a dependent student earns beyond this amount is assessed at 50 percent. In simple terms, for every two dollars you earn above $2,380, you lose one dollar in financial aid eligibility. What does this actually mean for you? You’re better off not working during the year before you enter college if you’ll earn more than $2,380.

Behind every rule is an exception, and there are two exceptions regarding your income that may help you answer the age-old question: How can I earn money for college without being penalized in financial aid?

Work-Study

Work-study jobs are typically on-campus jobs with very flexible schedules that you can do during the semester, usually for a maximum of 20 hours per week. The money you earn from a work-study job is exempt from EFC calculation. No matter how much you earn in work-study, not one dollar of that amount will ever decrease your financial aid eligibility. In terms of federal needs analysis, it is as if you never worked a day the entire year and had an income of $0.

This money should serve as a great incentive for you to apply for work-study on the FAFSA. Many students don’t apply because they think they can earn a better salary at a non–work-study position. This may be true—but their non–work-study wages will hurt their financial aid eligibility.

Some students answer no to the question on the FAFSA that asks, “In addition to grants, are you interested in ‘work-study?’” Students have the mistaken impression that by answering yes they are forfeiting grant aid or that they will be obligated to accept work-study. You can always decline work-study after it has been awarded. However, it is difficult to acquire it once classes begin.

AmeriCorps

AmeriCorps offers full- and part-time positions in the fields of education, the environment, public safety, and homeland security. In addition to hourly or biweekly wages, participants can earn up to $9,450 in college assistance for two years of AmeriCorps service. This money is known as the AmeriCorps education award.

Both the wages and the education award are exempt from calculation in the EFC. If you’re just a few months away from college and have no way to pay for it without relying primarily on loans, AmeriCorps can offer one of the best short-term strategies for delaying and then paying for school. Many students have delayed college for one year or more in order to serve in AmeriCorps and have come out ahead in paying for college.

10 Ways AmeriCorps Can Help Pay for College

  1. 1. It pays members wages that are excluded from EFC calculation.
  2. 2. It offers members an education award of up to $9,450, which is excluded from EFC calculation.
  3. 3. It pays the interest accrued on current student loans for members, and these benefits are excluded from EFC calculation.
  4. 4. Anyone looking to move to a new state to gain residency should know that AmeriCorps pays travel expenses for members who relocate.
  5. 5. It offers health care and child-care benefits to members.
  6. 6. AmeriCorps*VISTA offers the option of a post-service cash stipend of $1,200 for those who do not want an education award.
  7. 7. AmeriCorps*NCCC provides free room and board at its five campuses across the country.
  8. 8. It offers positions in many fields, including the environment, health and human services, public safety, and education.
  9. 9. Many of its programs have agreements with colleges that allow members to earn college credit while serving.
  10. 10. The National Service Alumni Network, at www.nsan.org, offers AmeriCorps alumni education and career services following program completion.
Spend Your Allowance

Let’s say you’ve just received $1,000 in graduation money and have not yet completed the FAFSA. Because cash that you have on hand is considered an asset, the federal needs analysis will assess this $1,000 at a rate of 35 percent when calculating your EFC. That results in a significant decrease in financial aid eligibility, especially since this money will probably be long gone before your first tuition bill arrives. In fact, you’ll probably spend the entire amount on things like clothes, appliances, and supplies before college even starts.

The less cash you have on hand when you complete your FAFSA, the more financial aid you’ll receive.

Gift Postponement

Still celebrating over the advice to shop to your little heart’s content? No so fast. If possible, you should do your best to decline gifts of money. That’s right: To maximize financial aid, you should just say no to gifts of cash during the base income year. Otherwise, you’ll wind up giving 35 percent of that money to pay for college, and you’ll decrease your eligibility for aid.

Remember: You and your family should take every opportunity to pay down consumer debt.

Dependency

Even though the primary responsibility of paying for college usually rests with both you and your parents, there may come a time when you’ll need to get by on your own. When you reach this point, the Department of Education considers you independent, and they’ll no longer include your parents’ income and assets when calculating financial aid. This generally means you’ll receive more assistance. Sound ideal? Sure it does. But becoming independent isn’t easy.

Becoming Independent

Seven Questions to Determine If You Could Be an Independent:

  1. 1. Will you be 24 years old by January 1 of the current school year?
  2. 2. At the beginning of the current school year, will you be working on a master’s or doctorate program?
  3. 3. As of today, are you married?
  4. 4. Do you have children who receive more than half of their support from you?
  5. 5. Do you have dependents who live with you and receive more than half of their support from you, and will do so until the end of the school year?
  6. 6. Are both of your parents deceased? Are you, or were you until the age of 18, an orphan or ward of the court?
  7. 7. Are you a veteran of the U.S. Armed Forces?

In terms of short-term strategies, you have very few options for being able to answer yes to most of these questions. However, if you were planning on getting married in the summer before college begins, it might be in your best interest to delay completing the FAFSA until after the ceremony. But remember: even though your parents’ income will not be included in the needs-analysis formula, your spouse’s financial information will be.

 
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