How parents can afford private school in the U.S.
How parents can afford private school in the U.S.
The annual average annual tuition among U.S. private schools is currently set at over $35,801 for a private university, $16,040 for a private high school, $8,700 for Private Elementary Schools and $37,590.
According to keyword search tool Ubersuggest, after searches for specific private schools within the U.S., the most searched phrases include "private school cost", "private school tax deduction" and "is private school cost claimable".
Studies have found that students are more likely to enrol in college when there are financial resources in place that can help them pay for it. A number of states are considering making the Free Application for Federal Student Aid (FAFSA) mandatory for high school seniors.
Private schooling as one of the largest expenses the average person may incur; leaving many stuck as to how they will actually afford it.
Although there is no way to get around the fact that private school is expensive, there are ways that you can plan and align your finances to be geared towards putting your children through private school. This article shares just some of the ways it can be done.
"There really is no one-fits-all approach when it comes to affording private school. It depends on income and many different background variables."
-Comments from Alistair Bambridge of Bambridge Accountants
Financial aid for private school
Federal Aids
The majority of federal aids are available towards higher education and career-furthering education.
There are a number of federal programmes that can be employed by parents saving for their child's education. For instance the Coverdell Education Savings Account (ESA), Roth IRA and Section 539 Plan.
K-12
Coverdell ESA
The ESA is a trust or custodial account that allows the contribution of up to $2,000 per year. Instalments are non-deductible contributions, however, will grow through tax-deferment.
None qualified-withdrawals may be taxed. To receive the full benefit of what the ESA has to offer, savings should go towards qualified expenses such as tuition and fees, the cost of books and in some cases room and board.
The main advantage of a Coverdell ESA is that it allows for the tax-deferred growth of its assets, as well as tax-free distributions for qualified educational expenses. Unlike, Section 592 plans, which limit how parents can invest the funds, Coverdell ESA investors can choose to invest their funds in whatever stocks, bonds, CDs, and mutual funds they believe will have the most growth over the life of their investment.
The biggest disadvantage for parents and donors is the rule requiring you to either distribute the Coverdell ESA by the time the child turns 30 or roll it over to another child. If the funds are not used by the time a child turns 30, the funds will be forced out at a 10% penalty.
Section 529 Savings Plan
Although some states have not opted to follow federal rules. In recent years the government have changed the rules in favour of using the 529 Savings Plan for K-12 education. Parents can use up to $10,000 per year from a Section 529 account to cover private K-12 expenses.
Section 529 plans are widely regarded as one of the best options for affording a child's college education. There are two types of Section 529: a savings account and a prepaid tuition plan.
The 529 plan is ideal for those who are wishing to save more than $2,000 per year and for those who are not entitled to a Coverdell ESA. Tax-deferral and tax-free withdrawals are two of the biggest potential advantages of the Section 529 plan. While the ESA does indeed offer this also, under a 529 plan it allows the parent or donor to remain in control of the assets indefinitely.
In 35 different states, 529 plans provide for in-state income tax deductions.
One of the downsides to the plan is that distributions for pre-college expenses are not considered qualified expenses. Investment options are also limited to 10-30 mutual funds.
Roth IRA
Traditionally used to save for retirement, the Roth IRA offers tax-free accumulation and withdrawal of earnings. Although we always advise clients to carefully consider potential risks associated with taking money out of pension savings; the Roth IRA can also be used for non-retirement goals, such as funding the private school.
Other areas to consider
Statewide financial aid
There is a lot of inter-state variation between the tax breaks available on private school costs. While many states do not allow tax credits and deductions for private schools, some do. Alabama, to name one, allows $2,814 for parents with children in schools classed as "failing" and Louisiana allows up to $5,000 per dependent for K-12 Louisiana based private school students.
Federal Work-Study Program
The Federal Work-Study Program allows undergraduates and graduates to work part-time and full-time jobs to help afford the costs of study. Students will earn the federal minimum wage as a minimum, and for those who live in a state with a higher minimum wage, students can expect to get a higher wage.
American Opportunity Tax Credit (AOTC)
The AOTC is a partially refundable tax credit for undergraduate college education expenses. The AOTC is worth up to $2,500 per student for the first $4,000 spent on qualifying education expenses. The maximum amount that can be claimed is $2,500 multiplied by the number of eligible students in your family.
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