Take Advantage of Education Tax Credits

It's time again for the dreaded annual exercise of filing tax returns and financial aid forms. But I offer encouraging news for many taxpayers faced with college tuition bills and other related expenses. Buried in the year-end extension of the Bush-era income tax cuts was the far less publicized renewal of educational tax benefits. For taxpayers who meet the income qualifications, these benefits provide some welcome tax relief and should not be overlooked as you begin to prepare your 2010 tax return. Eligible taxpayers who pay qualified educational expenses will want to take advantage of either the American Opportunity Credit, a tax credit of up to $2,500, or of the $4,000 Tuition and Fee Deduction, depending upon which provides the greater savings given one’s particular tax rate and circumstances.

The American Opportunity Credit, which was recently extended through 2012, will permit taxpayers who pay qualified tuition and related expenses to claim a credit against their federal taxes of up to $2,500 per year per student. Here’s how it works: Taxpayers can reduce their tax liability dollar for dollar for the first $2,000 of qualified expenses, plus take an additional 25% on the next $2,000. If you have a tax credit which exceeds your actual tax liability such that you cannot use some or all the benefit, you are eligible to receive up to 40% of the amount of the tax credit, or a maximum of $1,000. As long as your income is $160,000 or less for married couples and $80,000 for single taxpayers, you can take advantage of the maximum credit. The credit is ratably reduced for higher income levels and fully phased out at $180,000/$90,000. In order to take advantage of the credit, married couples must file jointly. A parent claiming the credit must also be the person paying the expenses for the eligible student, which can be oneself, a spouse, or a dependent, provided no one else has claimed the student as an exemption.

Families might find that, depending on their tax rate, it is more beneficial to take the $4,000 tuition tax deduction. The deduction is a direct adjustment to income and can be claimed even if one does not itemize expenses for tax filing purposes. Many of the qualifications are the same as those for the American Opportunity Credit, including income levels and the joint filing requirement for married couples. Unlike the tax credit, the deduction is per taxpayer and is not calculated on a per student basis. Therefore the tax credit is likely to be more favorable than the deduction for families with multiple students in college.

Taxpayers who paid interest on education loans can also deduct up to $2,500 in interest expense, thereby reducing the amount of income subject to taxes in the year the interest was paid. As with the other benefits, proceeds of the loan must have been used for qualified educational expenses. Furthermore, the taxpayer must be the borrower on the loan. Income limits to take advantage of this deduction are $70,000 and $145,000, for single and married individuals, respectively.

If someone in your family, yourself included, was a college student in 2010 and/or you paid student loan interest, don't lose out on the opportunity to take advantage of these tax benefits. Consult a tax specialist to ensure that you receive the maximum benefit available to you.

The ABC's of Financial Aid

It’s mid-December, two weeks away from the New Year. Many of us live by milestones that remind us how quickly time flies...birthdays, holidays, change of seasons. One of mine, I shamelessly admit, is the start once again of the financial aid cycle. With college applications hopefully finished or in the final stages, it is time to look ahead to the next set of deadlines, those for submitting financial aid forms. Bemoaning and complaining about the financial aid process is a yearly ritual. Yet it need not be so cumbersome and daunting. Familiarization with concepts, knowing deadlines and being organized is the key to successfully navigating aid forms and triumphing over the process. Here is my annual college financing primer which highlights some of the critical terms you will need to know.
The Cost of Attendance, or COA, refers to the total annual cost of college, not just tuition and fees. Don’t forget to factor in room and board, books, transportation, and other personal expenses when trying to estimate what a year of college will cost. College financial aid officers look at the total COA when they package aid awards. Come October 2011, colleges will be required to post the COA on their website.
The Free Application for Federal Student Aid, better known as the FAFSA, is used by colleges and universities to determine eligibility for financial aid. All students must file a FAFSA in order to receive any federal student aid. This includes the non-need based unsubsidized federally guaranteed Stafford student loans, so if you anticipate borrowing for college, you will have to complete the FAFSA. It becomes available online January 1, 2011 for the 2011-2012 school year at http://www.fafsa.gov/. Prior to filling out the form, both the student and one parent must each obtain a pin number which is in essence your electronic signature. You can register for a pin at http://www.pin.ed.gov/. Be sure to record your pin in a place where you can easily retrieve it for future use.
The Expected Family Contribution or EFC which is calculated from the information you provide on the FAFSA is the amount determined to be what the family can and should contribute to the cost of the student’s education. The EFC is based on the family’s current assets and prior year's income, including both the student’s and parents’ financial data.
After completing and submitting your FAFSA, you will receive a Student Aid Report, or SAR, which will show your EFC.
Nearly 600 schools also require that families complete the CSS/Profile form for the allocation of their institutional funds. The CSS/Profile is administered by the College Board and can only be filed online. Families can currently access the Profile for the 2011-2012 academic year by going to the College Board’s website: http://www.collegeboard.com/.
Now that you are familiar with these terms, there are some additional things that you should know about financial aid awards.
- Your “demonstrated need” (the COA minus your EFC) won’t necessarily be the amount shown on your SAR if the college also uses the CSS/Profile or another financial aid form. These methodologies are not the same, and therefore will produce different results. Institutions allocating their resources will naturally rely on the methodology that sets a lower threshold for your financial needs, so don’t be surprised if the aid package is less than you expected, even from schools that claim to meet demonstrated need.
- Colleges tailor the CSS/Profile formula to their specific institutional requirements. In other words, your demonstrated need may vary from school to school. For example, some colleges consider the equity in your home; others do not.
- The college offering the most financial aid may not necessarily be providing the best package. One has to look at the composition of each award. A financial aid package that meets need with grants which do not have to be repaid is far more attractive than one comprised entirely of loans.
- If your financial situation changes materially after you’ve filed the forms, such as loss of employment, you should notify the colleges immediately.
Lastly, be sure to visit the tuition and financial aid page of each school’s website (often buried in the Admission section) to check on requirements, deadlines and merit aid, if awarded. Meeting these deadlines is crucial. Since financial aid is a limited resource, getting things in early can make a difference. The sooner you complete the FAFSA, CSS/Profile and any other required forms, the better your chances of receiving financial assistance.

In Search of a Mascot

During my recent visit to the University of Illinois Urbana-Champaign, our tour guide casually shared a small, though perhaps not so insignificant detail: the school has been without a mascot since 2007 when the controversial native Indian Chief Illiniwek was retired in response to NCAA sanctions. While I’m sure this is not news to the Big Ten fans among you (I am shamelessly showing my ignorance about big time college sports), this revelation started me thinking. Do spectators need a mascot to foster loyalty and pride in their teams and school? How does the absence of a mascot impact school spirit, sales of logo emblazoned clothing, and even the prospects for a winning season? The mascot-less Illinois football team is currently in 8th place in its conference, but it would be quite the stretch to point the guilty finger at the erstwhile Indian chief mascot who has been gone nearly 4 years.

What makes the University of Illinois’ situation so unusual is that nearly every college and university in the United States has a mascot, regardless of the size, athletic division, or visible school spirit. Yet Chief Illiniwek’s disappearance from the Urbana campus doesn’t appear to have had any dampening influence on university pride. That’s not to say that students aren’t lobbying for a new mascot. I was struck by the swarms of orange clad students all over campus, proudly displaying their loyalty by donning school colors.

Whether or not a college is noted for its school spirit, the mascot is a symbol that engenders allegiance and instills a sense of being part of a community. Mascots reveal a fun and lighthearted side of any college, including those better known for their academic rigor than their football teams. Whenever I visit my daughter at her small New England college, a school that would probably rank low on anyone’s list of “rah rah” campuses, I can't help but notice the ubiquitous display of logos and official school attire. This sight tells me that students feel connected to the community and share a bond with others who, like them, wear their colors proudly. Even in the case of Illinois, a university still in search of a mascot, its well entrenched traditions and pride have clearly outlived the demise of a symbol.

So here’s my point. Most colleges, with or without a mascot, successfully foster a sense of community among their students. School spirit is a term that has become synonymous with “rah rah," but in fact, it exists wherever students find common ground and come together as a community. The next time you visit a college campus, notice how many students are wearing their school colors and logo, and find out about traditions and activities unique to that college campus. And don’t forget to inquire about the school mascot.

College Costs - Achieving Greater Transparency

Even in a down economy with inflation almost non-existent, the cost of a college education continues to rise at a shocking 5% a year for private colleges. It’s not surprising that more families are asking the question: can we afford this? Improved disclosure requirements under the federal Higher Education and Opportunity Act (HEOA) may not help you pay the bill, but they will take some of the guess work out of the process.

Until recently it had not been so easy to determine a school's true Cost of Attendance or COA, which includes all the expenses associated with going to college, beyond just tuition and fees. Fortunately for the college consumer, schools are now required to provide reasonable estimates for all costs, including books, travel and other personal expenses. HEOA also stipulates that colleges have until October 2011 to display net-price calculators on their websites. These calculators will enable families to obtain a ballpark estimate of the net cost to them, after factoring in the financial aid package they might reasonably expect to receive from the school.

For those who do not wish to wait until a year from now, there are ways to get closer to estimating the actual amount they will pay. One of the best sources is the US Department of Education’s College Navigator website: http://nces.ed.gov/collegenavigator/. This site provides a treasure trove of data pertaining to individual college costs and average financial aid awards based upon income ranges. Type in the name of a school and you will have access to the most current data reported to the U.S. government by the college. My only caveat is that you use these ranges as a guide; they are not a reliable determinant of what you will ultimately pay. Financial aid results are driven by a rather in-depth review of your personal data. Simply comparing your income to the school's posted ranges might be misleading, as income alone does not capture your full financial picture. You won’t know your actual out-of-pocket cost and the composition of the financial aid package until you file your aid applications and have the final award letters in hand.

The soon-to-be required net-price calculators will be an even more powerful tool for gaining an understanding of college costs. Colleges have the option to either build their own or use a template created by the federal government. At a minimum, the calculator must contain eight data elements designed to determine dependency status, estimate the Expected Family Contribution and approximate the COA. A handful of colleges, including Princeton, MIT and Purdue University, have gotten a jump on the task, and have already posted calculators on their websites. Even if your child is not applying to one of these colleges, you might want to play around with their calculators to get a sense for how varied your financial aid results could be from school to school.

Familiarizing oneself with the cost of college before a student actually applies will help families realistically adjust their expectations and target schools that are good fits both academically and in terms of affordability. The schools with the highest sticker prices might not be the most expensive after financial aid. Net price calculators which will be school specific should be reasonably effective in providing a ball park estimate. But as with many things, the devil will be in the details. You should use these tools to ensure that both financial and academic safeties find their way to the college list. Creating a list with affordable options will help everyone sleep better at night.

Demonstrated Interest - Making Your Intentions Known

How important is it to let a college know that you really want to attend, beyond merely submitting your application? “Demonstrated interest” refers to any way in which a student reaches out to a college to show that the school is a top choice. Whether it is a campus visit, participation in an alumni interview, or reaching out to an admission representative, demonstrated interest is now a factor in the admission process for roughly 50% of the colleges that participated in a recent National Association for College Admission Counseling (NACAC) study.

Why has demonstrated interest become so important in the admission process? The short answer is, blame it on the economy. With colleges feeling pressure to manage enrollment, especially during times of economic uncertainty, the better they can predict who will attend, the more successful they will be at filling the class and generating tuition dollars. Furthermore, improved enrollment forecasts can benefit a school’s rankings. Colleges that both lower their acceptance rates and increase yields (the percentage of accepted students who actually enroll) are likely to see their national rankings benefit too.

The obvious next question is, what is the best way to demonstrate interest and which schools care? Applying Early Decision, of course, is a clear indication to the school that it is your first choice. Since Early Decision is binding, the college has no doubt that your interest is genuine. Other ways to show you are serious about a school is by visiting the campus, scheduling an interview, especially if the college recommends it, and contacting the admission representative who covers your region. Seeking the answer to a question that is not readily available on the college website is a great way to initiate contact. When you visit a campus, be sure to fill out the information form in the admission office so that your visit is duly noted. Some colleges will tell you outright that your expression of interest is a factor in their admission process. Either way, it does no harm to get on the mailing list and contact your regional representative, as long as your questions are thoughtful and not excessive...never stalk!

However, not all colleges and universities consider demonstrated interest in their admission processes. Wondering why you weren’t asked to fill out a form when you toured Yale? Not surprisingly, the most selective colleges do not factor in demonstrated interest and therefore do not record who shows up and who doesn’t. During a WSJ/Unigo webcast presentation (Unigo is the college search website that features reviews from current students), the dean of admission at Wesleyan shared that one-third of the incoming freshman class had not visited, interviewed or contacted the admission office prior to or after submitting an application. Her point: the school does not factor demonstrated interest in its admission process. Some colleges, including Duke and Stanford, will tell you outright that it makes no difference.

So how do you find out who cares and who doesn’t? It is not exactly the question you want to pose to the admission office, so play it safe, get on the mailing list and schedule that interview (on campus or with an alumna) if interviews are offered and recommended. A well posed question might win brownie points at the college that values your expression of interest. You have nothing to lose. Just don’t stalk.

A Commitment to Match Financial Aid - The New Ivy League Approach

Paying for college is one of the most pressing concerns for families today, which is why I feel compelled to share ideas that may help families manage the cost. Followers of my blog have read my postings on the merit aid “arms race,” or how colleges use tuition discounting to attract the students that they especially want to enhance their class profile. However, a battle for exceptional students has now taken hold at the top tier of selective colleges: the Ivy League.

As many of you know, the eight Ivy League colleges, along with a handful of other highly selective schools, do not offer merit aid to students. Even those with mega-endowments use their financial aid resources exclusively for students who demonstrate financial need. This naturally figures; such colleges and universities have no trouble drawing top students, so there is no incentive to offer grants just to lure students away from other schools. Besides, merit aid awards run counter to the more important mission of access regardless of cost. Yet that does not mean that these toughest admit schools aren’t thinking about ways to compete with their peer institutions for students. With little fanfare, two universities, Cornell and Dartmouth, decided to go head to head with other Ivies, using financial aid for precisely that purpose. Both universities will soon match the aid packages that students are awarded by other Ivies and a few highly competitive schools too.

Back in 2007-2008, partly due to government pressure to spend their endowments on students rather than lose tax-exempt benefits, some 40 top tier schools dispensed with loans for the neediest students. Two universities with the largest endowments, Harvard and Yale, set an even higher bar in order to also benefit middle income families: At Harvard students with family incomes of less than $60,000 pay nothing, while those who make less than $180,000 have their costs capped at10% of their income. For Yale students, the income ceiling which allows students to take advantage of the 10% maximum out-of-pocket is a whopping $200,000. Cornell, having a far larger student body and much smaller endowment, is in no financial position to compete with such hefty aid packages for all of its students.

Yet not wanting to lose out on some of these gifted students, Cornell has found a way to compete without offering such generous awards across the board. Starting with the class enrolling for the fall of 2011, Cornell will match the offer of other Ivies to which the student has been accepted. Cornell has issued the same match policy for students accepted to Duke and Stanford. However, if your child happens be one of the students in this high class problem category, don’t expect Cornell to come to you. It is up to the student to approach Cornell to request the additional aid based upon the competing package.

Sure, this will affect a very limited group of students: those who are smart and lucky enough to be accepted to at least two Ivy League schools while also qualifying for financial aid. Yet the concept of competing aid policies does expand the notion of affordability of an Ivy League education to a broader universe of middle income families. The student who would choose Cornell or Dartmouth over Harvard will no longer have to factor cost or potential outstanding debt into the equation. This is a positive step forward for college affordability. But just so you don’t think I’ve completely taken leave of my senses, let me assure you that I am fully aware of the most difficult hurdle which remains: Getting in!

It's Mid-August - Must Be College Ranking Season

Today the U.S. News & World Report published its annual Best Colleges 2011, the granddaddy of school rankings that students and their families too often use as the definitive source and arbiter for academic quality. Sure, USNWR provides a detailed explanation of its methodology as if to suggest transparency. Yet it still fails to convince this reader that the formula inputs offer anything but a highly subjective assessment that does little to assist students in finding schools that are the right fit and that will provide a meaningful and fulfilling college experience.

This year USNWR tweaked its criteria, with the most significant adjustment being the weighting of input from other education professionals. Though this now accounts for 22.5% rather than 25% of the total ranking, the methodology still places far too much emphasis on some subjective measure of a school's reputation. The good news is that only 15% is determined by administrators from competing institutions who I’m certain rarely if ever step foot on the college campuses they are judging. Even if they do, is this not a conflict of interest? For the first time high school guidance counselors have a say in the rankings and make up 7.5% of the 22.5% reputational factor. I am skeptical whether this actually helps students make informed college decisions. Most high school counselors know that students would be better served by considering fit over someone else’s opinion of a college’s place on a list that has questionable criteria.

Here is my question for every student and parent who feels compelled to look at the college rankings: what is there about this list of colleges and the way it is presented that gives you any insight about the academic strengths, the quality of life, the social scene, or the support services, academic and otherwise available at each school? I am not suggesting that all of the factors are meaningless. For example, I also believe that graduation and retention rates are important. However, a couple of statistics do not tell the whole story. The top schools on each of these ranking lists, for the most part, are all well endowed and can provide substantial need based aid. What about colleges of quality that cannot afford to be as generous with financial aid? In this economy many students are forced to take a leave from their education due to lack of adequate funds to pay tuition and support themselves through school. In other words, the economy is hurting retention numbers for some fine colleges that cannot spend as much as they would like on aid. My point is, too little information about what drives the numbers often leads one to draw the wrong conclusions.

But is it a “good” college? My own 17 year old has finally learned to stop asking me that question, though when she occasionally slips, she quickly recovers with, “I know, I know…don’t confuse selectivity with quality.” She’s finally catching on! Isn’t it curious that the colleges with the lowest rankings also have the lowest acceptance rates? The correlation between acceptance rate and a ranking which is supposed to order schools by some measure of “best” is especially troubling to me.

U.S. News & World Report is not the only publication to issue its assessment of colleges this month. Forbes.com recently published its list of America’s Best Colleges which has many surprises that will have you scratching your head, especially when compared with the USNWR rankings. And lets not short change Sierra Magazine’s current ranking of the Greenest Colleges. If you are not happy where your own alma mater ranks on any of these lists, be patient. Another ranking is sure to be released shortly.