Hope Scholarship

The Hope Scholarship provides a $1,650 tax credit per student per year

for higher education expenses during the first two years of post-secondary

education. The amount of the credit is 100% of the first $1,100 of

qualified tuition and related expenses per student and 50% of the second

$1,100 of qualified tuition and related expenses. The taxpayer must list

the student as an exemption on their income tax return and the

expenses must have been paid by the taxpayer or by the student.

(Any qualified tuition and related expenses paid by the dependent

are treated as though they were paid by the taxpayer, per

26 CFR 25A(g)(3).) Scholarships and financial aid do not count as

qualified tuition and related expenses paid by the taxpayer.

Only out-of-pocket expenses count. Gifts, bequests and inheritances

do count as though paid by the taxpayer.

The credit is allowed only for the first two tax years of higher education expenses per student. Typically the first tax year will correspond to the fall of the student's freshman year in college, and the second tax year will correspond to the spring of the freshman year and the fall of the sophomore year. The student must be enrolled at least half time for at least one academic period that begins during the taxable year. The credit is allowed only for the first two years of postsecondary education. It cannot be used if the student already has two years of post-secondary education. The credit will be denied for a student convicted of a felony drug offense. If the family has multiple students that meet the requirements, then multiple Hope Scholarship Credits may be claimed. The maximum credit per student per year is $1,650. Parents cannot use a Hope Scholarship with the Lifetime Learning tax credit for the same student in the same year, but you can use them for different students' educational expenses in the same year.

Deduction for Student Loan Interest

Parents can deduct up to $2,500 in student loan interest. The deduction is taken as an adjustment to income, so they can take the deduction even if they don't itemize deductions on Schedule A. The deduction has certain income maximum levels. Taxpayers who are married but file separate returns are not eligible.

Requirements: The interest must be paid on a qualified education loan for you, your spouse, or someone who was your dependent when the money was borrowed. You must not be claimed as an exemption on someone else's tax return.  The person for whom the expenses were incurred must have been enrolled at least half-time in a degree program. You cannot take the deduction when the expenses were paid using certain tax-free education benefits, such as employer education assistance, tax-free withdrawals from a Coverdell Education Savings Account, US savings bond interest, veterans educational assistance benefits, and certain scholarships.  You cannot double-dip, meaning that if the interest is deductible elsewhere on the return (e.g., home mortgage interest), you cannot also deduct it as student loan interest.  Eligible education expenses include tuition, fees, room and board, books, supplies, and equipment, transportation expenses, and other necessary expenses (as included in the school's student budget). Parents who do not qualify because of making too much income should consider having their child borrow the funds. Not only does the Stafford Loan have a lower interest rate than the PLUS loan, but the student is less likely to exceed the income phase outs.

The regulations also clarify that only the person legally obligated to repay the education loan may take the interest deduction. If someone else makes payments on a student's education loans, the student gets to take the deduction, not the other individual. For example, if a grandparent helps the student out with a few loan payments, the student takes the deduction, not the grandparent. These payments are treated as though they were first paid to the student, and then by the student to the lender.

A qualified education loan is defined as a debt borrowed solely to pay higher education expenses. Mixed-use loans do not qualify. This means that if the borrower refinances their education loans and receives cash out, interest on the new loan is no longer deductible. However, if the excess cash is only used to pay for higher education expenses, the interest on the new loan remains deductible.

Interest on private education loans qualifies, provided that the higher education expenses are attributable to a particular academic period and the disbursement used to pay for those expenses occurred during the academic period or a 90-day window at the start and end of the academic period. Education loans do not need to be federally guaranteed to qualify. The debt, however, may not be owed to anybody who is related to the borrower.

Employer Education Assistance

An employer may provide up to $5,250 in employer education assistance benefits for undergraduate or graduate courses tax-free each year. The benefits must have been paid for tuition, fees, books, supplies, and equipment. Travel, lodging and meals are not included. Courses involving sports, games or hobbies are not included, unless they are required as part of a degree program or are related to the business of the employer.

Payments above $5,250 may also be tax-free, if they represent a working condition fringe benefit. This means that if a student had paid for the expenses, they would have been able to deduct them as an employee business expense.

Student Loans

Many students rely on federal government loans to finance their educations. These loans have low interest rates and do not require credit checks or collateral. Student loans also provide a variety of deferment options and extended repayment terms.

The federal loan for students is called the Stafford Loan and has two variations:

Federal Family Education Loan Program (FFELP) loans are provided by private lenders, such as banks, credit unions and savings & loan associations. These loans are guaranteed against default by the federal government.

Federal Direct Student Loan Program (FDSLP) loans, administered by "Direct Lending Schools", are provided by the US government directly to students and their parents.

All Stafford Loans are either subsidized (the government pays the interest while students are in school) or unsubsidized (students pay all the interest, although they can have the payments deferred until after graduation). To receive a subsidized Stafford Loan, students must demonstrate financial need.

With the unsubsidized Stafford loan, students can defer the payments until after graduation by capitalizing the interest. This adds the interest payments to the loan balance, increasing the size and cost of the loan. All students, regardless of need, are eligible for the unsubsidized Stafford Loan.

Stafford Loans allow dependent undergraduates to borrow up to $5,500 their freshman year, with no more than $3,500 of this in subsidized loans.$6,500 (for loans first disbursed on or after July 1, 2008) if you've completed your first year of study and the remainder of your program is at least a full academic year. No more than $4,500 of this amount can be in subsidized loans.  $7,500 (for loans first disbursed on or after July 1, 2008) if you've completed two years of study and the remainder of your program is at least a full academic year. No more than $5,500 of this amount can be in subsidized loans.  If you're an independent undergraduate student (and a dependent student whose parents have applied for but were unable to get a PLUS Loan (a parent loan), each year you can borrow up to: $9,500 (for loans first disbursed on or after July 1, 2008) if you're a first-year student enrolled in a program of study that is at least a full academic year. No more than $3,500 of this amount may be in subsidized loans.  $10,500 (for loans first disbursed on or after July 1, 2008) if you've completed your first year of study and the remainder of your program is at least a full academic year. No more than $4,500 of this amount may be in subsidized loans.  $12,500 (for loans first disbursed on or after July 1, 2008) if you've completed two years of study and the remainder of your program is at least a full academic year. No more than $5,500 of this amount may be in subsidized loans.

If you're a graduate or professional degree student, each year you can borrow up to: $20,500. No more than $8,500 of this amount may be in subsidized loans.

When you graduate with a graduate or professional degree, the maximum total debt allowed from Stafford Loans is $138,500. No more than $65,500 of this amount may be in subsidized loans. This maximum total graduate debt limit includes Stafford Loans received for undergraduate study. However, the aggregate loan limit for graduate and professional students enrolled in certain approved health profession programs is $224,000. 

For all unsubsidizedStafford loans first disbursed on or after July 1, 2006, the interest rate is fixed at 6.8 percent.

The interest rate for subsidizedStafford loans first disbursed on or after July 1, 2008 is fixed at 6.0 percent. This change from a variable to a fixed interest rate does not affect a borrower's variable interest rate on loans made before July 1, 2006.

For Stafford Loans first disbursed between July 1, 1998 and June 30, 2006, the interest rate is variable (adjusted annually on July 1st) but will not exceed 8.25 percent. (You'll be notified any time the variable rate changes.) The interest rate for these loans in 2008-09 is 4.21. (These rates apply to loans in repayment status; the rate may be lower during grace and deferment periods.)

The Perkins Loan is awarded to undergraduate and graduate students with exceptional financial need. This is a campus-based loan program, with the school acting as the lender using a limited pool of funds provided by the federal government. (The Perkins Loan is the best student loan available. It is a subsidized loan, with the interest being paid by the federal government during the in-school and 9-month grace periods. There are no origination or guarantee fees, and the interest rate is 5%. There is a 10-year repayment period.

The amount of Perkins Loan a student receives is determined by the school's financial aid office. The program limits are $4,000 per year for undergraduate students and $6,000 per year for graduate students, with cumulative limits of $20,000 for undergraduate loans and $40,000 for undergraduate and graduate loans combined. Perkins loans can be discharged based upon certain financial situations and based upon specific student career choices that are made. 

Federal Supplemental Educational Opportunity Grants

Parent Loan

Parents of dependent students can take out loans to supplement their children's aid packages. The federal Parent Loan for Undergraduate Students (PLUS) lets parents borrow money to cover any costs not already covered by the student's financial aid package, up to the full cost of attendance. Like the Stafford Loan, PLUS loans are either FFELP (provided by private lenders, such as banks) or Direct (funds provided by the government).

For PLUS Loans disbursed on or after July 1, 2006, the interest rate is fixed (at 7.90 for Direct PLUS Loans and 8.50 percent for FFEL PLUS Loans). For PLUS Loans disbursed between July 1, 1998 and June 30, 2006, the interest rate is variable and is determined on July 1 of every year. For 2008-2009, the variable rate for these PLUS Loans (in both the Direct and FFEL programs) is 5.01percent. Interest is charged on a PLUS Loan from the date of the first disbursement until the loan is paid in full.

Your parents will pay a fee of up to 4 percent of the loan, deducted proportionately each time a loan disbursement is made.

Private Loans

Private Loans, also known as Alternative Loans, can help to bridge the gap between the actual cost of a higher education and the limited amount the government allows students to borrow in its programs. Private loans are offered by private lenders and there are generally no federal forms to complete.

Some families turn to private loans when the federal loans don't provide enough money or when they need more flexible repayment options. For example, a parent might want to defer repayment until the student graduates, an option that is not available from the government parent loan program. (Many PLUS loan providers are starting to allow parents to defer payments on the PLUS loan while the student is in school.) Lenders provide different types of private loans depending on the student's level of study. Also, private loans tend to cost more than the loans offered by the Federal government.