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Education Financing

A combination of financing methods can help you come up with financing for education. Make sure to use any tax-deductible methods for which you qualify.

If you will be 59 ½ years of age during the time that your child is in college, you can use a Roth IRA as investment means. This can be useful because withdrawals will be tax free, if you have had the account for a minimum of five years. Even if you will be younger than 59 ½ during the time, you can still use Roth IRAs to your advantage. You can actually withdraw contributions without paying penalties and taxes, and you can use your earnings to pay for college without a penalty. However, you will have to pay taxes in this case. Note that the taxes are not applied to the proceeds from Education IRAs, but contributions are limited. This may pay for some college expenses if you begin when your child is very young, but it will not pay for an entire four-year degree.

Other options include the Hope Scholarship Credit, which allows a deduction of 100 percent of the first $1,000 of qualified tuition and fees and 50 percent of the next $1,000. The maximum is $1,500 per year. It helps out, but it is not a type of education financing that can pay for the entire college education.

A financing option that can make a bigger impact is the state college savings (529) plan. It gives a chance to earn stock-market returns on college savings that you do not need for many years. The contributions grow tax-deferred until the funds are used to cover college. After this, earnings are taxed at the student's tax rate. If the money is not used to finance college education, a penalty of 10 to 15% of your accumulated earnings or 1% of the account balance is applied. Another type of 529 plan, the prepaid tuition plans, are great financing options when tuition rates are rising at around 10% a year. However, when tuition increases level off at 4 to 5%, the plan is not very useful.