American Opportunity Credit: A New Tax Break for Students

Well, it’s W2 season out here in Taxpayerland.

Time to start thinking about your 2009 income tax return.

Me? I had a very productive weekend. I took care of my state and federal taxes, and also FAFSA.

This year, there’s a new tax break for full-time college students: The American Opportunity Credit  (AOC). It’s part of the American Recovery and Reinvestment Act (ARRA), and offers a tax credit on higher-education costs.  Eligible costs include tuition, fees, textbooks, and supplies.

Books and supplies need to be specifically required for classes. You can’t just say, “Well, I’ve been wanting a new laptop, so now’s a good time to get it.” If, however, your college requires students to buy a laptop, that’s an eligible expense.

The AOC allows you to take a tax credit on college costs not covered by grants and scholarships. Your college may send you a 1098-T form, which states how much you paid in tuition and fees and how much you received in scholarships and grants.  If you’ve received a 1098-T form, compare the amounts in Boxes 2 and 5.  If the amount in Box 2 is bigger than Box 5, then you should be eligible to take a tax credit for the difference.

The tax credit is 100% of the first $2000 and 25% of the second $2000. The maximum credit is $2500, and (depending on your financial situation) you may get a refund of up to 40% of the credit ($1000). I was able to get the $1000 refunded, which certainly helps a semi-starving student.

Example 1:

Tuition and fees: $10,000

Scholarships and grants: $6,000

In this case, $4,000 was not covered by scholarships and grants.

100% of the first $2,000: $2,000

25% of the second $2,000:  $ 500

Total tax credit:  $2,500

Potential refund (40%): $ 1,000

Example 2:

Tuition and fees: $5,000

Scholarships and grants: $3,500

In this case, $1,500 was not covered by scholarships and grants.

100% of the first $2,000: $1,500

25% of the second $2,000:  N/A

Total tax credit:  $1,500

Potential refund (40%): $ 600

By the way, don’t worry if you used student loans to pay education expenses that grants and scholarships didn’t cover. This tax credit only takes grants and scholarships into consideration.

Sure, not all non-traditional students attend college full-time, but a great many are putting their own kids through college at the same time. This tax credit can be used for each qualifying dependent student. A full-time student with one or more dependent children in college can save a sizable chunk on their taxes.

Overall, the American Opportunity Credit is a great way to reduce your income tax bill… and maybe get a little cash back!

Important Links:

irs.gov: The American Opportunity Credit

irs.gov: American Opportunity Credit Q & A

wikipedia: American Opportunity Credit

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Coping with the cost of college

The average tuition for in-state students at our state universities has risen 6.6% this year to $6,185 per year. Believe it or not, that is still a bargain when compared to private colleges, which charge an average annual tuition of $23,712.  (source: MSNBC article “College tuition still rising”)

As the costs of higher education continue to rise, it’s very easy for would-be students to grow discouraged. College is expensive, but is not necessarily out of reach. There are several ways of lowering your education costs.

COMMUNITY COLLEGES

Community colleges are probably the best education bargain around. At an average cost of $2,361 per year, it makes good financial sense to look into a community college.

You can save a big chunk of money on tuition, while completing the first two years of a four-year degree. Transfer agreements between community colleges and four-year colleges are becoming the norm, allowing students to transfer easily. Many community colleges have specialized Associate’s Degree programs with courses and credits that are designed to transfer smoothly.

For non-traditional students, community college can be an ideal re-introduction to the academic world.

FEDERAL FINANCIAL AID

You may very well be eligible for financial aid… but you won’t know unless you apply!

The crucial first step is to complete the FAFSA (Free Application for Federal Student Aid). I can’t emphasize enough the importance of FAFSA! All financial aid (grants, loans, scholarships) stems from this important application. Visit the official FAFSA site for more information.

You might not think you can get financial aid, but it costs you nothing to try. Frankly, if you don’t earn very much money now, you may find you are eligible for grants and loans that higher-earning people are not. Ask your college’s financial aid department about grants and scholarships for non-traditional students. They’re out there.

CREDIT FOR LIFE EXPERIENCE

In many cases, this come-on IS too good to be true. No legitimate college will allow you to exchange your life experience entirely for academic work. Perhaps in some situations, it could work for one or two courses’ worth of college credit.  But the truth is, schools that promise actual degrees for little or no actual school work should raise your suspicions.

Here’s an example of how life experience could earn college credit legitimately. Let’s say you’ve worked as a bookkeeper for many years and have decided you would like to advance your career and get a Bachelor’s degree in Accounting. A legitimate college might give you credit for one or two of the most basic accounting courses in that degree program. This would reflect the knowledge and experience you already have, but you would still be responsible for completing the rest of the program. It’s a good head start, but not a substitute for actually earning a degree.

TESTING OUT OF COURSES

Another option, which is somewhat related to Credit For Life Experience, is to “test out” of certain courses. If you are knowledgeable on a particular subject, you can take an exam that, if passed, will be recognized as college credit.

The CLEP (College Level Examination Program), for example, will evaluate your knowledge and skills in a variety of subjects. At present, a CLEP exam costs about $65, which is a great bargain compared to the cost of tuition for a comparable college course. For more information, visit the official CLEP website.

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I originally wrote this article for Helium.com. It has been edited slightly.

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Spammers among the blog commenters

My blog comment spam filter caught this gem sometime last month:

A little hard to read up there:  “It is tiring attempting the compute the hours we’ve used up searching for pell grant web pages.”

Now, I don’t have a lot of patience for spam and self-promotion in my blog comment area. It’s a rampant marketing tactic, but I find it disrespectful and, well, sleazy. I delete a lot of spammy comments around here.

For the online casino folks here, I suppose it’s nice that they at least tried to make their spam look like an actual blog comment written by a human being. They used relevant keywords, anyway.

Right now, I’ll make lemonade out of, err… this spam: if they’re struggling that hard to find FAFSA (the only legitimate website for Pell Grant applications), then I hope my blog will help them find it!

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Possible savings on textbooks this fall!

This looks really promising: Four Reasons Textbook Costs Will Drop (from US News & World Report).

I thought I was doing well by getting used textbooks through Amazon, but there are some really interesting options developing– e-textbooks and textbook rental.

Also, I’m thrilled to see lawmakers doing something to help students! (Although the cynical side of me wonders who will benefit from this– this will decrease the amount of loan money that may go into default.)

Still, good news!

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Bush: the economy is “basically sound”. Ha.

From this morning’s New York Times:

“My hope is — is that people take a deep breath and realize that their deposits are protected by our government,” the president said. He added that economic growth “was not the growth we’d like” but expressed confidence that the country would overcome “a time of uncertainty.” The nation’s troubled financial system is “basically sound,” he added.

In other– apparently unrelated, according to the president– news, my school’s financial aid office called today.

It seems I need to pick a new lender for my subsidized Stafford loans. Bank of America, which was my lender for the 2007-2008 school year, is no longer an available option.

I was under the impression that Bank of America had only suspended their private student loans, and would continue to issue federally-guaranteed loans, such as the Stafford.

However, I just found an article that states

Be particularly vigilant if you’re attending a smaller college with a higher drop-out rate, Kantrowitz says. Higher drop-out rates usually lead to more loan defaults, and some lenders are cutting off relationships with such schools.

This reminded me of something else I’d read: community colleges will most likely bear the brunt of our basically sound sluggish economy. Two-year institutions unfortunately have a risky and unattractive (to lenders) combination of low tuition rates (smaller loans = less overall profit) and greater risk of loan default.

I’m guessing that’s what has happened with my Bank of America Stafford loan.

And yes, this is all very scary. I hope the banking and student loan systems manage to keep themselves together long enough for me to get my Bachelor’s degree!

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Summer classes

In about two weeks, I start my summer class– COM100– to fulfill the dreaded public speaking requirement.

While I am nearly not so shy as I once was, I still dread public speaking. I’m not alone, though. Glossophobia– stage fright, or the fear of public speaking– is believed to be the single most common phobia — affecting as much as 75% of the population. In fact, many people actually rank public speaking above death on their lists of worst fears!

I decided to take this class during the summer to bite the public speaking bullet and get it out of the way as quickly as possible. It helps that my beloved Mass Media & Popular Culture instructor is teaching it. That will soothe the pain and anxiety considerably.

My school offers three summer sessions. The 15-week session takes up the entire summer, about equal in length to the regular fall and spring semesters. Two shorter sessions each compress an entire semester’s worth of study into seven and a half weeks. The format will vary from school to school, but it may be similar to this.

Time factors

Summer classes can be especially worthwhile for non-traditional students.

• Those shorter sessions, if your school offers them, can help you rack up credits quickly. If you take one or two summer classes each year, you could possibly graduate a full semester sooner!
• Taking a class during the shorter session will somewhat lessen any sacrifices for you and your family.  Any schedule disruptions will be blessedly short-lived, much to the relief of everyone involved!

Plan ahead and choose wisely.

Depending on the school, summer offerings can sometimes be frustratingly limited. However, there are several ways of planning your summer classes wisely.

• In the early spring, when meeting with your academic advisor to plan your fall classes, discuss possible summer classes too.
• Hold on to course catalogs from previous semesters! You can look for patterns of when certain courses are offered. Some classes might usually be offered during the fall, others only during the spring. Plan strategically for the coming semesters. Also, if you miss a spring course, you may get lucky and find it available during the summer.  Nowadays, course schedules are usually posted online, too, but might not be available after a certain amount of time.
• If any of your courses have pre-requisites (one or more introductory courses required before taking a more advanced course), take them during the summer. That way, you can jump right in during the fall semester.
• Consider the summer offerings at other schools in your area. If another school has a course that’s comparable to one at your college, you may be able to take it and transfer the credits.  Check with your registrar first to see if it’s transferrable, of course.
• Community colleges are always a great bargain, especially for general education requirements and introductory courses.  My school charges about $312 for a three-credit summer class. They also often have easy credit-transfer agreements with local four-year colleges. You can save a lot of money this way!
• If your financial aid department does not fund summer classes, though, you will have to pay for them out of pocket. Set aside a chunk of your fall and spring financial aid money and earmark it for summer class(es). If you work during the school year, save your money! Even if you save only $10 (roughly two Starbucks lattes) out of each week’s paycheck,  by May you’ll have about $360 to pay for summer tuition!
• Find more money-saving tips for the starving student on my other blog!
• Look up the instructors on a site such as  ratemyprofessors.com to help make your decision. You can learn a lot about teaching styles, expectations, and work-load. While you’re there, do other students a favor and take a few minutes to honestly rate the teachers you’ve had, too! It’s a great tool, but only works if everybody particpates honestly.

Other thoughts

While summer classes are sometimes more relaxed in atmosphere, they are still more concentrated due to time constraints. Once in a while, you might get lucky with a much-easier course load during the summer version of a particular class, but there’s no guarantee. Think about your strengths and weaknesses. If there are subjects that naturally come easily for you, consider taking them in the compressed summer-time format. Save the more difficult courses for the regular semester. For example, I probably wouldn’t want to take Statistics or Pre-Calc during the short session! I’d rather stretch something like that out through an entire full semester, so I have enough time to absorb it. Everyone is different, of course.

Well, for the rest of the summer, I look forward to working part-time, conquering the fear of public speaking, and spending plenty of time at the pool.

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Think you can’t afford it?

In case you’re interested in knowing what financial aid covers in real life, I will share my actual numbers with you.

The amount of money the financial aid department budgeted for me below is a few thousand more than the package they actually offered, but that’s okay. I could have borrowed more to cover the shortfall, but I chose not to take on any more debt than necessary. I will manage very well.

BUDGET (2007/08 SCHOOL YEAR)

(As estimated by my college’s Financial Aid department)

$ 3,000.00    Tuition and fees

6,150.00    Room and board

1,200.00    Books and supplies

1,300.00    Miscellaneous

1,500.00    Transportation

0.00     Dependent Child Care

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$13,150.00 Total estimated need

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FINANCIAL AID AWARD PACKAGE
(2007/08 SCHOOL YEAR)

$ 4,310.00    Federal Pell Grant

300.00    Federal Supplemental Grant

1,200.00   Maine State Grant Program

300.00   Chamber of Commerce Scholarship

1,200 .00   Federal Work-Study

3,500.00   Subsidized Stafford Loan

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$10,810.00 Total Financial Aid Award

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As you can see, financial aid will cover most typical living expenses. Your situation may be very different than mine, but it’s worth looking into what you’re eligible for. The first crucial step is filing your FAFSA (Free Application for Federal Student Aid)*.

I don’t have dependent children, but if I did, the cost of child care would be included. That should soothe the concerns of single moms who think they need to choose between daycare and an education.

Some variables that affected my financial aid eligibility:

• I’m a woman over age 35
• My adjusted gross income for 2006 was under $7000 (very tough year!)
• Neither of my parents went to college

Other things to keep in mind:

• I’ll be a full-time student at an inexpensive community college
• I’ve lived in Maine for a year and a half, qualifying me for the lower in-state tuition
• I’ll be living off campus, but not far away (save on gas: walk/bike/take the bus when weather’s bad)
• I am very frugal with my money!
• Aside from an on-campus Work-Study job, I won’t necessarily need to work during the school year
• Grants and scholarships do not need to be paid back; loans do.
• Not everyone qualifies for a Pell Grant, but you won’t know unless you apply for federal financial aid

Depending on your personal situation and finances, college can be very affordable for you.  YOU CAN DO IT!

* I  can’t stress enough the importance of filing your FAFSA (Free Application for Federal Student Aid) early! For example, if you plan to start in the Fall of 2008, you need to apply for FAFSA in January or February of 2008. Student aid money is awarded on a first-come-first-serve basis, so the earlier you apply, the better.

A future blog will discuss FAFSA in detail.

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