College Savings

Too Late to Save?

IRA withdrawals for education

Tax penalty-free distributions can be made from IRAs if used to pay for qualified higher-education expenses for a taxpayer, his or her spouse, or any child or grandchild of either. (Withdrawals are subject to regular income tax. Tax penalty-free education distributions cannot be made from qualified plans.)

The Hope Scholarship Credit

This provides 100% credit for the first $1,000 of expense toward the first and second year of eligible post-secondary education of eligible students and a 50% credit for the second $1,000, for a maximum total of $1,500. The amounts are subject to phase-out for higher-income taxpayers. The credit amount and income limits are also indexed for inflation. In 2009, the credit is $1,800.

The Lifetime Learning Credit

This allows a credit of 20% of qualified tuition and related expenses up to a maximum credit of $2,000. The amounts are subject to phase-out for higher-income taxpayers. Unlike the Hope Scholarship Credit, the Lifetime Learning Credit is not indexed for inflation.

Deduction for student loan interest

A deduction is allowed for interest paid on qualified education loans subject to income limits. The maximum interest that may be deducted is $2,500 per year.