Paying for Private School
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The Loan Lowdown
A few local banks offer loan programs aimed at helping you pay for your child’s K-12 independent-school education. Oahu One Credit Union’s (www.oahuonecu.org) independent-school loan program is in its 10th year. To open an account, families need to have at least one child enrolled in a private school. The 12-month loan is currently offered at a 5.95 percent APR for families who qualify and there’s no maximum loan amount. Once the paperwork is complete, Oahu One mails the check directly to your child’s school and, should you need it, Oahu One can automatically renew your loan, as long as you’re still in good standing.
Hawaii Central Credit Union’s (www.hccu.info) loan can be spread out over 12 to 72 months with current interest rates of 5.9 percent for a one-year term and 7 percent for up to a six-year term with a maximum loan amount of $20,000 per borrower (if both parents individually qualify, they can get up to $40,000). To become a member, applicants need to either work for a company or have a relative that works for a company with less than 3,000 employees in the state of Hawaii.
Tax Incentives, Gifting and Other Strategies
If you’re willing to get creative with your finances, there are other means of finding tuition money but, it should be noted, each of the following has its pros and cons, can involve fairly complicated tax laws and should be done with the help of a qualified professional. One such strategy is to borrow against the value of your home by refinancing your existing mortgage, taking out a second mortgage or applying for a home-equity credit line. Back when the real-estate market was booming and interest rates were low, this was a fairly viable option, but with market prices currently in a downward spiral, most people no longer have the equity, not to mention that, as a result of the mortgage-lending crisis, banks are tightening their lending criteria.
“Because of the change in real estate prices and the underwriting standards,” says Carolyn Santo, a Honolulu-based certified financial planner, “if you’re planning to tap into equity in real estate, you need to make sure you can get a loan because real estate lending has dramatically changed. Don’t automatically assume interest on a real estate loan will be fully tax deductible.” The other major drawback of borrowing against your home is that changing financial circumstances can put your home at risk.
It might be worthwhile, says Santo, to consider taking money out of employer-sponsored retirement plans or life-insurance policies. If your retirement plan allows loans, you can borrow up to half of the vested balance and a maximum of $50,000—so if you have a $60,000 vested balance, you can borrow up to $30,000. Here’s the catch: You need to repay the loan within five years, and, if you already have an outstanding loan, you may not be able to borrow the maximum amount.
“One of the bonuses is if you borrow against your own account, you’re borrowing your own money,” says Santo. “You’re paying yourself back. You don’t have to go to the bank and negotiate. There’s no qualification process and the repayment rules are set by the federal government.” Borrowing money from life insurance is similar to taking money out of your retirement plan—it’s your money and there’s no qualification process. However, if you have older, universal life insurance where the cost of the insurance goes up every year as you age, you need to make sure that there’s enough money left in the policy to offset the increase in cost.
For many families, financially secure grandparents or other relatives often help foot the bill for private-school tuitions. For people with large estates, this has several added tax benefits. In 2009, under the annual gift exclusion law, any individual can give another individual an annual, tax-free gift of $13,000, meaning both grandparents can give a grandchild $26,000. This gift is not taxable as income to the child and it escapes gift and estate taxes, which can be as high as 45 percent (it’s scheduled to go up to 55 percent in 2011). These annual gifts do not count as part of the $1 million an individual can give away during his lifetime without incurring gift taxes. And, if Gram and Gramps are extra generous, they can avoid gift taxes on any amount they pay directly to the school, even if they’ve already given $13,000 apiece directly to the child.
Lastly, if your school’s curriculum is specifically designed to help your child overcome a learning disability as defined by the federal government, whether it’s dyslexia, autism or visual impairment, your tuition and any other related expenses—the miles you drive to take your child to school, special tutoring, learning aids, etc.—could be deducted as medical expenses. For example, families with children attending ASSETS School or the Variety School of Hawaii may be able to deduct tuition or other educational expenses because both schools are aimed at helping students overcome specific learning disabilities, including dyslexia, attention deficit disorder and autism.
Hawaii’s families have always made sacrifices to send their children to private schools, knowing that giving up a little here and there would allow their kids to receive the kind of educations necessary to lead exceptional lives. “Parents who have chosen one of Hawaii’s private schools understand that the best education is a values-added experience that provides a structured, nurturing environment where young people learn not only reading, math and science,” says Witt, “but also the importance of hard work, leadership, personal responsibility and good citizenship.” Despite the economic challenges, Hawaii’s independent schools are continuing to do what they do best: provide A-plus academics and safe, nurturing learning environments. “Even though we’re all constrained by this economic burden,” says Nelson, “we’re all still maintaining the missions of our schools. We’re all vibrant places to enroll the children. It’s worth the investment.”