IMPORTANT NOTE: This information does not constitute financial advice. It is intended to help students and others understand the various financial mechanisms that exist as they are making decisions about pursuing a postsecondary education.

Every effort has been made to ensure that the information provided is complete and accurate. The EAB cannot be held responsible for any loss incurred as a result of the use of this information. As with any financial or tax matter, it is recommended that proper professional advice be sought before any action is taken. All figures cited are current for tax year 2015.

The cost of pursuing postsecondary education and training usually requires a significant investment of time and money. Beyond an individual's own resources, there are a wide range of financial options intended to help make the pursuit possible. However, because the financial options are so varied they can be a challenge to understand. Moreover, unique circumstances specific to each individual add to the complexity.

For many, paying for education and training requires some type of financial aid. This might consist of a grant, scholarship, work-study, or loan. In addition, there are an increasing number of tax incentives available, such as credits, deductions and tax-free savings programs.

Financial Aid

Government and School Sponsored Funding: Scholarships and grants are monies that do not have to be repaid. School sponsored work-study programs involve earning money either on or off campus during the academic year. Many scholarships, grants, and work-study programs are typically awarded to students who have demonstrated financial need as determined by the a federal formula based on the results of the FAFSA (Free Application for Federal Student Aid). As these options provide a debt-free way of funding all or a portion of your education, you should explore these options first.  Additional information about financial aid programs is available from the U.S. Department of Education.

In general, the degree-granting institutions approved by the EAB participate in the federal financial aid programs (also known as Title IV). Information on whether a specific EAB-approved school participates in Title IV programs is available when using this website's school and program search feature. Although students attending these institutions are eligible for federal financial aid, they are not currently eligible for state financial aid provided by the state of Wisconsin.

Tuition Payment Plans: Tuition payment plans are an interest and debt-free way to spread tuition payments over several months. This option is best for families who have discretionary income that will cover all of, or a portion of, the gap between the cost of attendance and the financial aid received. When evaluating this option, consider that an enrollment fee or participation fee is often required. Compare this fee to the fee or tax implications of liquidating an asset or the interest associated with a loan.

Student Loans: There are several types of loans available to students. Federal student loans are low interest, long-term loans which offer attractive repayment options. The federal student loan program includes loans for both parents and students. In addition, third-party or alternative student loans are offered by federally sponsored financial institutions such as SLM Financial (Sallie Mae), Key Bank, Wells Fargo and others. These are often available to students who choose to attend institutions that do not participate in the federal student aid programs. For information on ways to avoid deceptive student loan practices, the Federal Trade Commission and the U.S. Department of Education have developed a student resource guide.

Home Equity Loans: Many parents choose home equity loans or second mortgages because they are readily available – assuming they have equity in their home and good credit. Home Equity Loans are tied to the amount of equity you have in your home. The interest accrued and paid is typically deductible on a federal tax return.

Credit Cards: This option is typically not the best choice for students or their families as interest rates on credit cards tend to be high.

Tax Incentives

Tax Credits: A tax credit is an amount that you're allowed to subtract from what you owe in taxes. When you pay college costs, you can subtract a certain amount from your tax bill later on. There are two different tuition tax credit programs. The amount of the credit varies and is subject to a number of rules, depending on which credit you use and how the money is used, such as tuition/fees or room/board. You may not claim more than one type of credit for the same student in any one year.

The American Opportunity Tax Credit provides a federal income tax credit of up to $2,500 (40% refundable) per student based on the first $4,000 in postsecondary tuition, fees and course materials paid by the taxpayer during the tax year. The credit equals 100% of the first $2,000 and 25% of the second $2,000. The tax credit is limited to the first four years of postsecondary education.

The Lifetime Learning Tax Credit provides a federal income tax credit of up to $2,000 per taxpayer based on the first $10,000 in postsecondary tuition and fees paid by the taxpayer during the tax year. The Lifetime Learning Tax Credit is 20% of the first $10,000. The tax credit may be received for an unlimited number of years.

Tax Deductions: There are a number of tax deductions that persons may be able to claim. For a student for whom no education credit is claimed, tuition and fees may be deducted to reduce income. Qualifying expenses must not have been paid with any other tax-free benefit. There is also a tax deduction for work-related education that is required to keep your job or to maintain or improve skills needed in your present work, but not if the education is needed to meet the minimum requirements of your position or is part of a program to qualify you for a new trade or business. Finally, up to $2,500 of interest paid on qualified student loans may be deducted. The deductions are phased out as income rises.

In addition to the above federal tax provisions, students attending any EAB-approved institution are able to claim a tax deduction from their state income (the maximum deduction for TY 15 was $6,943). More detailed information is provided in the Form 1 Instructions available from the Wisconsin Department of Revenue.

529 Savings Plans: A 529 savings plan (named after its section number in the IRS code) is a state-sponsored investment program to help save for postsecondary education costs. The savings can generally be used to pay for education costs at any accredited degree-granting educational institution, whether it is a public, private, two-year, or four-year institution. In Wisconsin, the state contracts with an asset management company, and investors open a 529 account with that asset management company.

The following are some of the advantages of a 529 college savings plan.

• No taxes are paid on the account's earnings.
• The investor (not the beneficiary) has control of or access to the account.
• If the beneficiary (typically a child) chooses not to attend college, the account can be rolled over to another qualifying family member.
• Anyone can contribute to the account.
• There are no income limitations that might make an investor ineligible for an account.
• Most states have no age limit for when the money has to be used.
• If the beneficiary receives a scholarship, any unused money can be withdrawn without paying any penalty (just the tax).

Investors have two option under a 529 plan. One option lets you prepay tuition at a qualified educational institution at today's tuition rates. Another option lets you save money in a tax-deferred account (earnings only) to be used to pay for education at future tuition rates. The idea, with either option, is that the investment earnings will grow to meet the higher costs of future education.

Wisconsin's state-sponsored college savings program is made up of the EdVest and the tomorrow's scholar College Savings Plans.

IMPORTANT NOTE: More detailed information about tax benefits for education can be found in IRS Publication 970.

Other Assets: 401K plans, stock portfolios, savings accounts, and IRAs offer a debt-free option for funding education. Before liquidating an asset, consider the earnings that you'll be foregoing as well as any associated fees or penalties. Then, compare the lost earnings to the interest that would accrue on a student loan or the fee on a tuition payment plan.

Resources and Links

U.S. Department of Education
Consumer Financial Protection Bureau
Wisconsin Department of Financial Institutions
Internal Revenue Service
Wisconsin Department of Revenue
Wisconsin Higher Educational Aids Board
Wisconsin Edvest (College Savings) Program
Federal Trade Commission
National Association of Student Financial Aid Administrators
Student Loan Borrower Assistance