Financing Private School

Private school education is not cheap, but it doesn’t have to break your budget.  Affording a quality education does take some planning, and most families employ several strategies to keep the costs within reach. It is important to keep in mind that the family bears the primary responsibility for financing a child’s education, to the extent that it is able. After that, there are others out there to help you in your efforts.

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The first people you call should be the financial aid officers at the individual schools you are considering. They can explain the full range of options offered by their school and may also be able to provide some information on the limited outside funding sources available. Financial aid strategies and policies vary from school to school, so it is important to ask each school about the specifics of their various options and see how these options fit within your financial planning.

Here are some tips to help your family finance the right school for your child.

 

1. Look into financial aid.

Most schools consider applications for admission and financial aid separately. That means asking for aid won’t hurt your child’s chances of getting in. If you’re going to ask for aid, do so early. Missing deadlines will hurt your chances. And remember, not all private schools charge five-figure tuitions. Almost half of Hawaii’s private schools have tuitions of less than $6,000 a year.

 

2. Look into lines of credit.

Some schools will allow you to put tuition and fees on a credit card. This may have some side benefits—many cards offer airline miles or other rewards.

You can get a loan. Some banks and credit unions will give you a favorable rate on a tuition loan.

If you are thinking of financing long term, your best bet may be a home equity line of credit. There may be certain tax advantages to borrowing against your home, and you may have the ability to make interest-only payments for an extended term. Most financial institutions offer some equity lines of credit, and interest rates remain low. The downside, of course: Any money borrowed against equity puts your home at risk, should you face financial reversals.

 

3. Set up a Coverdell Education Savings Account.

Coverdell ESAs replace what used to be called Education IRAs. In 2002, the law was changed to make the accounts more attractive. As with anything tied to the IRS code, the rules for a Coverdell ESA can get a bit complex.

Unlike an IRA, you can’t use a Coverdell ESA to defer taxes on your income. However, you can contribute up to $2,000 per child to an account per year. Any earnings on the money are tax-free when they are used for educational expenses.

Coverdell accounts aren’t just for college. You can use a Coverdell account to pay the costs of elementary or secondary education, in public, private or religious institutions. These costs are fairly broadly defined and include uniforms, supplies and computers.

You don’t have to be a parent to establish a Coverdell ESA. You can contribute to the education of a niece, a cousin, a grandchild, even a neighbor’s or friend’s child. The only sticky point: No single child can receive more than $2,000 in contributions in a year, no matter who makes them.

There are income limitations. If you make more than $190,000 a year as a couple (or $95,000 as a single filer), the amount you can contribute is reduced. If you make more than $220,000 a year as a couple (or $110,000 as a single filer), you can’t contribute at all.

However, in one of those weird quirks of the tax laws, you can–even if you’re over the income limits–give the child the $2,000. The child can then make the contribution to the account, presuming, of course, that he or she doesn’t have $95,000 a year in other income. You’re right: This makes no sense. It does, however, follow the letter of the law. There may be gift tax restrictions if you give other money to the child.

Your contributions have to be in cash, and you must set up the account specifically as a Coverdell ESA, at any bank or IRS-approved financial institution.

You can either maintain control of the account or turn it over to your child when he/she turns 18. All funds have to be spent by the time the child turns 30. But, the account can be transferred to another family member under age 30, and family is fairly broadly defined.

 

4. Look into your tax situation.

In addition to Coverdell accounts, there are other education tax breaks. A number have income restrictions and most apply to higher education, but some may be relevant to you if you’re paying for private school.

The best overview is IRS Publication 970, “Tax Benefits for Education.” You can download a copy at http://www.irs.gov/pub/irs-pdf/p970.pdf. Fair warning: “Tax Benefits for Education” is 83 pages long and less fun to read than a Harry Potter book. If IRS publications give you a headache, you might just ask a tax adviser.