Unique Ways to Pay for College

Here are some additional ideas on paying for a college education:

Government Series EE savings bonds. They're considered safe, and interest is tax-free for low and middle income families if bonds are held in a parent's name and they are used to pay tuition during the tax year of redemption. More good news: The tax on the interest doesn't have to be paid until the bonds are cashed.

Zero coupon bonds. Like savings bonds, these bonds are issued at a discount from the face value and pay the specific face value amount at a maturity date you select. Caution: The amount of discount from the face value may be included in income.

UGMAs and UTMAs. Which stand for: The Uniform Gifts to Minors Act and the Uniform Transfers to Minors Account, which let parents transfer small to medium-sized investments to minor children for tax advantages.

Grandpa and Grandma. This may get students over the college financing hump: Tuition payments made to the school are not subject to a federal gift tax. Just make sure they make the check payable directly to the school.

Hope and Lifetime Learning Credits. Federal tax credits are available to either a parent or a child who pays out of pocket for qualified tuition expenses. The Hope Scholarship Credit provides up to $1,500 per year for each student enrolled at least part-time during the first two years of post-secondary education. The Lifetime Learning Credit allows only $1,000 per family.

Student loan interest deductions. Parents may be able to deduct student loan interest for loans incurred on behalf of their dependents for qualified education expenses. See your accountant for details.

Education IRAs. Non-deductible contributions up to $500 a year without penalty to an Education IRA are allowed for children up to age 18. The money grows tax deferred and withdrawals for up to the child's amount of qualified education expenses for that tax year aren't subject to federal taxes. Parents must withdraw the money before the beneficiary turns 30.

State programs. State government programs vary from state to state. Several states, including Minnesota and North Carolina, now offer state savings/matching programs. Check with your state government for details.

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