The Hope scholarship credit, available in 1998, allows you to deduct from your taxes, dollar for dollar, qualified tuition and related expenses for the student's first two years of post-secondary education. In the student loan interest deduction, you can deduct the interest payment during the first 60 months on a higher education loan. In 1990, the Treasury Department initiated the Education Bond Program, which allows interest to be completely or partially excluded from federal income tax. Payments to state tuition plans became eligible this year. Bonds pay 90 percent of the five-year Treasury rate, increase in value monthly, and can earn interest for 30 years.
Bonds are an excellent way to save for college.
They are easy to buy and can be registered in the parents' names or the child's name. Interest can be fully excluded if the taxpayer meets certain income guidelines. Many children receive bonds as gifts from relatives, and parents usually ignore the bonds until they mature, then pay tax on the interest income. Instead, parents should report interest on the bonds each year. By following this strategy rather than waiting to pay taxes when you cash in the bond, you could save 30 to 35 percent in taxes.