Federal Student Loans and Tax Incentives

Federal Student Loans and Tax Incentives

Entering higher education is now easier and more accessible than ever before. The Federal government has set up a number of student-aid programs to encourage people to further their education or to aid them with existing student loans. The Treasury has also created three tax credits to aid students with the cost of education by reducing the cost of income tax. This post will look into the main student-aid programs and tax incentives to help you decide what option fits your needs and circumstances best.

Grants – the best type of student loans, simply because they do not have to be repaid. There are a number of grants you can apply for. We detail two examples of grants currently available, but you should check which ones are open to you, because they are plenty to choose from.
TEACH Grant, Teacher Education Assistance for College and Higher Education Grant. This grant offers up to $4,000 per year, but you must be willing to spend 4 years out of 8, after finishing the program, working as a secondary school teacher for schools that serve low-income students.
Federal Pell Grant. This grant can offer you up to $5,350 a year. How much you get will depend on your financial need, the university you plan to attend and if you are a full or part-time student.

Campus Based Aid – These are programs that work like grants, i.e. they do not need to be repaid, but are managed by the financial departments of each educational institution. There are three main campus-based aid schemes: FSEOG, Federal Work Study, and Federal Perkins. Not all schools participate in all three program so check with yours before considering this option.  FSEOG is a good example of what you can expect from this type of aid. It is a grant for students with special financial problems. Pell Grant recipients with the lowest EFCs (expected family contributions) will be considered first. The grant ranges from $100 to $4,000.

Federal Perkins Loans – These are loans made by participating schools to undergraduate, graduate and professional degree students. The loans will be repaid to your school. You will need to prove financial need to apply for this type of loan.

Stafford Loans – These loans are for all type of degree students that are studying at least with a half-time status. There are two types of Stafford loans, subsidized and unsubsidized. With the subsidized type the U.S Department of Education will pay for the interest accrued on the loans for a certain period of time, although you will have to prove financial need. Unsubsidized loans are for everyone, but you will have to pay interest on your loan balance. Interest rates are 6 percent for subsidized loans and 6.8 for unsubsidized ones.

Plus Loans (direct or FFEL) – These are special loans principally designed for the parents of students that need help to pay for their children’s education. However, you can also apply for your own Plus Loan if you are a graduate or professional degree student. These loans have a fixed interest rate of 7.9 percent.

Consolidation Loans – These are student, or student parent’s, loans that are used to combine various federal student loans into one loan with one monthly payment.

Tax Incentives – There are three types of tax credits, a) the lifetime learning credit, b) the HOPE credit and c) the American opportunity credit. Lifetime credit offers a maximum of $2,000 credit a year ($4,000 for Midwestern disaster areas). This credit is nonrefundable, which means it can reduce your tax payments to zero, but it will not result in a refund. Lifetime credit can be applied for every year for the lifetime of the student. HOPE credit offers a family with at least one student in a Midwestern disaster zone up to $3,600 a year credit. This is also a nonrefundable credit and is restricted to two years of post-secondary education. American opportunity credit is similar to lifetime credits, but is only available for four years of post-secondary education, but has a upper limit of $2,500 credit available per student.