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Options for Paying for College
Jean Keener, CRPC, CFDP®

The world of higher education has received some attention in Washington this year.  I’ve done several posts on the topic, but wanted to offer this summary of both what’s passed and what’s proposed in the budget for FY 2010.

The American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law by President Obama in February. This legislation, along with President Obama’s proposed budget for FY 2010, contains several provisions related to higher education.

Hope Credit

The Hope credit is a tax credit for college tuition and related expenses. ARRA changed the Hope credit significantly. For 2009 and 2010, the Hope credit is renamed the American Opportunity tax credit and can be worth $2,500 per student per year, up from $1,800. (President Obama’s FY 2010 budget blueprint proposes making the credit permanent.) In addition, the credit now applies to the first four years of a student’s post-secondary education, provided he or she attends at least half-time (previously, the credit applied only to the first two years of college). And the income limits for qualifying have been increased:
  • A full credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 (previously $50,000) and joint filers with a MAGI below $160,000 (previously $100,000)
  • A partial credit is available to single filers with a MAGI between $80,000 and $90,000 (previously $50,000 and $60,000) and joint filers with a MAGI between $160,000 and $180,000 (previously $100,000 and $120,000)
Other points to note about the new credit:
  • The credit may be claimed against an individual’s alternative minimum tax liability
  • Up to 40% of an individual’s allowable credit may be refundable
  • For purposes of the credit, the definition of “qualified tuition and related expenses” is expanded to include course materials
  • By increasing both the amount of the credit and the income limits to qualify for it, and by expanding the availability of the credit to all four years of college, the federal government has put the focus on helping traditional college students pay for college. (Congress did not increase the amount of the Lifetime Learning credit, which is geared more toward occasional courses taken by students who are enrolled in school less than full-time.)
Qualified expenses and 529 plans

ARRA has expanded the definition of “qualified higher education expenses” for 529 plans to include expenses paid or incurred in 2009 or 2010 for computer technology, equipment, and Internet access, provided they are used by the 529 plan beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution. This means you can take a tax-free withdrawal from your 529 plan to pay for these items. (Previously, a computer had to be required by the college in order to be considered a qualified education expense.)  This carve out for computer-related expenses is similar to the existing provision for K-12 computer expenses currently allowed by Coverdell education savings accounts.

Pell Grants

ARRA increased the maximum Pell Grant to $5,350 for 2009/2010 and to $5,550 for 2010/2011. President Obama’s FY 2010 budget proposes making the Pell Grant program a mandatory spending program with automatic increases tied to the Consumer Price Index.

Federal Family Education Loan program

President Obama’s 2010 proposed budget seeks to eliminate the Federal Family Education Loan program in 2010. If it passes, all student loans would be made through the federal government’s Direct Loan program.

Financial Aid

According to www.whitehouse.gov, President Obama wants to simplify the federal financial aid application process by eliminating the current FAFSA application and allowing families to apply by simply checking a box on their tax form, authorizing their tax information to be used. Stay tuned to see whether this major time-saving objective will happen in 2010.

This article originally appeared on the NAPFA Personal Finance Blog in conjunction with FiGuide.com.  See the original article at http://www.figuide.com/your-options-for-paying-for-college.html.

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