Tax breaks alone can add more than $2,500 to your college fund.
Even if you haven’t saved a penny for college, don’t qualify for a single scholarship, and have too much month left at the end of your paycheck, college finance experts say you can probably scrape together at least $9,500 for next year’s tuition bills from the five following resources. If you’re extra frugal, the amount you raise in the next year could total more than $15,000.
$5,500 + from student loans: Every undergraduate who files a Free Application for Federal Student Aid can borrow at least $5,500 directly from the federal government. Federal student loans charge very low interest, don’t require payments while you’re in school, and can be partially forgiven if you work in a public service job for 10 years. You might be able to borrow more. Upperclassmen can borrow $2,000 more than the freshman standard loan of $5,500, for example. And undergraduates who are over the age of 23 can borrow as much as $12,500 a year.
Be wary of borrowing more than the standard amounts, however, warn experts such as Mark Kantrowitz, publisher of Cappex.com. His rule of thumb: Limit your total college borrowing to your expected early career salary. The federal Bureau of Labor Statistics reports that the average earnings for young 20-something males with bachelor’s degrees is $33,500. For women, it is $26,800.
$2,500 from federal tax breaks. If you pay at least $4,000 of your fall tuition with your student loan or money from a checking (or other non-tax advantaged) account, you can claim the American Opportunity Tax Credit (AOTC) next year, notes Kal Chany, author of Paying For College Without Going Broke. The AOTC can reduce your federal tax bill by as much as $2,500. And if you earn so little that you don’t pay any taxes, go ahead and file anyway: The AOTC will qualify you for a check from the government for as much as $1,000. (The AOTC is available only to singles who earn less than $90,000 a year, or married couples who earn less than a combined $180,000.)
$1,500+ from student work. While on-campus work-study jobs can sometimes be hard to find, they typically net about $1,500 over the academic year. Kantrowitz notes that students can earn much more than that, however. Working 12 hours a week at the minimum wage during a 30-week academic year grosses $2,610. And summer earnings can add a few thousand dollars more. But Kantrowitz warns against trying to earn too much. His research shows that students who work more than 12 hours a week during the school year have a higher dropout rate.
$4,500+ from reduced household costs. If a student moves to campus, the family back home tends to notice a significant reduction in weekly expenses. Those savings can be directed towards college costs. How much can you expect to save? The Bureau of Labor Statistics estimates that it costs about $300 a month for a family to feed a teenager. Insurance companies such as Allstate will cut car insurance premiums by 10% if a student driver moves to a campus at least 100 miles away (and doesn’t bring a car.) Water and heating bills typically drop as well.
Paula Bishop, a Bellevue, Wash., CPA who specializes in college finances, estimates that families who combine the savings with a few reasonable frugalities (such as paring back on vacations) can cut their household expenses by as much as $700 a month for the nine months the student is away.
$50 to $1,000 from state tax breaks. In 30 of the 33 states that offer tax breaks for contributions to 529 college savings plans, you can cut your state tax bill by as much as $1,000 by writing a few extra checks. All of the states with tax breaks—except for the District of Columbia, Montana, and Rhode Island—will give you a state tax benefit for contributions to a 529 even if the money is in the account for only a few days. So once you’ve paid the first $4,000 for tuition (to make sure you qualify for the federal tax credit), cycle the money you’re planning to send the college for tuition, fees, room, or board into your 529, wait for the check to clear, then use the 529 to pay your remaining college bills.
Your savings will depend on your state’s rules, how much money you cycle through the 529, and your own state tax obligation. But an analysis by Vanguard indicates that the average state tax break for families earning $100,000 a year who use this technique to cycle through $10,000 totals about $300 a year. Indianans benefit the most, however, with state tax savings of up to $1,000. You can use Vanguard’s tool to see how much, if anything, you’d save by using this technique