Rags, riches and college costs

Today is the birthday of Horatio Alger,
a 19th century author of novels for young people in which he chronicled the
travails and ultimate successes of characters who rose from
impoverished circumstances to lead happy and successful lives.

The
core of every Alger story was how down-and-out boys could achieve the
American Dream of wealth and success through hard work, courage,
determination and concern for others.

While kids today tend to equate the American Dream with American Idol, when Alger's rags-to-riches stories were published lo those many years ago, the books were incredibly popular.

Alger
still has his modern-day fans. And as his quote indicates, his devotees tend to do work in his name to
promote educational opportunities for young people who otherwise
couldn't afford it.

The nonprofit Horatio Alger Society
presents "Strive and Succeed" awards every year to graduating high
school seniors who "have overcome significant adversity in their
lives."

Another, much larger 503(3)(c) group, the Horatio Alger Association of Distinguished Americans,
is a nonprofit educational organization that, according to its Web
site, "was established in 1947 to dispel the mounting belief among the
nation's youth that the American Dream was no longer attainable." Each
year it gives out numerous scholarships through various nationwide programs.

Tax-favored college savings:
Scholarships and grants are very welcome ways to cover some college
costs. But most of us depend on our, or our parents', resources to get
us through school. And that, as this Marketplace story notes, can have long-term financial consequences.

But your Uncle Sam wants to help.

There
are several tax provisions that offer breaks for your college costs or
help you save in tax-advantaged ways for your continuing education.

529 Plans
These
savings plans, named for the Internal Revenue Code section under which
they were created, are the big winners for most folks stashing college
cash. You can't deduct contributions to a 529 plan, but the money
invested in the plan accumulates tax-free. Even better, when you
withdraw account funds to pay for qualified education costs, those
distributions are not taxed.

529
plans are administered by states, and every state now has at least one.
And you can shop for a plan beyond your borders and set up an account with any state's 529 program.

But
it might be tax-wise to stay local. Your state might offer additional
tax advantages, such as a deduction on your state return, if you open
an in-state account.

Coverdell Education Savings Account
Coverdell
Education Savings Accounts (ESAs) were once known as education IRAs
because the accounts operate much the same way. In 2002, the accounts
were expanded and renamed (after the late U.S. Sen. Paul Coverdell of
Georgia).

Like
529s, Coverdell contributions aren't tax deductible. But the money
earned in an ESA can be withdrawn tax-free as long as it's used to pay
eligible schooling costs. And in this case, this includes educational
expenses from kindergarten to college.

The big drawback here is that only $2,000 a year is allowed to be contributed to a Coverdell ESA.

Educational tax credits
Tax
credits are subtracted directly from any tax you owe, which tends to
make them a better tax break than deductions, which simply reduce your
taxable income amount. There are two popular educational tax credits.

The Hope Credit helps pay for up to $1,650 in expenses for a freshman or sophomore college student.

The
Lifetime Learning Credit is more expansive, both dollar-wise and its
application. It covers costs any student at any level — undergraduate,
graduate or even course work to improve job skills; even part-time
class attendees can use it. As for the amount, the Lifetime Credit can
be as much as $2,000.

Tuition and fees deduction
This
tax break is one that be claimed regardless of whether you use the
standard deduction or itemize. It's found on both Form 1040 and 1040A
and could reduce your taxable income by as much as $4,000.

Student loan interest deduction
Another
tax deduction that can be used by standard deduction filers (and
itemizers, too) is the student loan interest write-off. Here you can
deduct up to $2,500 in student loan interest.

Savings bonds
When you cash in U.S. savings bonds to pay educational expenses, the interest becomes tax-free.

Workplace benefits
Some
employers offer their workers assistance to continue or complete their
educations. If you have such a munificent boss, you can get up to
$5,250 in help to go to school and not have to count that money as
taxable income.

Of
course, all of these tax-smart educational options come with
eligibility requirements, rules to follow and in many cases income
limit phaseouts. But if you qualify and use them wisely, they can help ease the financial pain of all that book learning!

You can read more on Uncle Sam's educational aid in IRS Publication 970.