Financing Higher Education

• Coverdell Education Savings Accounts (formerly Education IRAs). These tax-free savings plans may be set up for a minor child to pay qualified education expenses for the designated beneficiary. A maximum of $2,000 can be contributed per year to the account up until the child reaches 18 years of age. Contributions are limited by the giver's modified adjusted gross income. The fund must be used to pay for qualified expenses by the time the beneficiary reaches age 30. Such "distributions" can be used to cover qualified expenses for both elementary/secondary education and higher education. The fact that the account must be in the child's name can affect the child's eligibility for federal financial aid. DCU offers Coverdell Education Savings Accounts.
• State-sponsored 529 Plans. Every state in the U.S. offers at least one of these college savings programs, which are established in the name of the beneficiary and which provide tax-free growth. No federal income tax is owed when a distribution is made for the beneficiary's college costs. Although the plan is state sponsored, the funds may be used at any accredited college or university in the country. A 529 Plan has several benefits. First, it's an easy account to manage because the donor simply determines a monthly contribution; like a mutual fund, the investment is handled by the plan managers. Second, the maximum amount that can be saved is large. Although monthly contributions can be as small as $50 per month, the total amounts that can be contributed can be large, as much as $200,000 or more per beneficiary in some states. Also, there are no income or age restrictions.
  You can find information about each state plan at The College Savings Plans Network.
• Education Bond Program. This US Treasury Department program allows interest to be completely or partially excluded from Federal income tax. The bond owner must pay tuition and fees at a college, university, or vocational school or pay into a State tuition plan in the same calendar year that the bonds are redeemed. Series EE bonds issued after January 1990 and all Series I bonds are eligible. You don't need to indicate that you plan to use the bonds for education when you buy them but you must meet the program requirements. For more information about these bonds, check out the Education Planning web page of the Treasury Direct site.
• Prepaid Tuition Plans. These are state-sponsored college savings plans that allow you to buy tuition units. This means that if you buy units for one semester (or quarter) now, the units will still pay for one semester (or quarter) when your child goes to college. Previously, these plans locked you into state schools but with the advent of the 529 Plans, there is a little more flexibility.

• Federal Pell Grants – This program provides grants that do not have to be repaid. They are available for undergraduates only. Applications are submitted through the individual school.
• Federal Stafford Loans – These loans are available to undergraduate and graduate students, and loan eligibility increases for each subsequent year of study. Stafford loans may be obtained directly from the federal government (Direct Loan Program) or from a private lender. The federal government guarantees the loan funds. The variable interest rate can never exceed 8.25%. If you qualify for a subsidized Stafford loan, the government will pay the interest on your loan while you are in school. If you have an unsubsidized Stafford loan, you are responsible for paying all the interest that accrues. The school or lending institution determines whether you qualify for a subsidized or unsubsidized loan based on financial status. An individual who receives a subsidized loan may also get an unsubsidized loan.
• Federal PLUS Loans – These unsubsidized loans are made to parents by private lending institutions. The variable interest rate can never exceed 9%.
• Federal Supplemental Educational Opportunity Grants (SEOG) – These grants, which do not have to be repaid, range from $100 to $4,000 per year for students who remain eligible and are only available for undergraduates. The participating school administers the program and receives the application.
• Federal Work Study – This program provides jobs for undergraduate and graduate students. The money earned is applied to education expenses. The participating school administers the program and receives the application.
• Perkins Loans – These are low interest (5% APR) loans administered by the individual school. Undergraduates can borrow up to $4,000 annually and graduate students can borrow up to $6,000 annually.

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