ALAN S. MOORE

Paying for college expenses late in the game There’s no rest for the parents of college-bound students. Once you get over the first hill – getting your child into the right college, you have to find a way to climb the mountain that lurks behind it – paying the bills for tuition and living expenses. What is the best way to get the money you need for freshman year and beyond if you haven’t been saving for years? Unless you have a very generous relative, consider the following options:

Get A Home Equity Loan

You may be able to borrow large amounts, with a home equity loan secured by your principal or second residence. These loans also offer a tax advantage. Income tax laws treat the interest on an ordinary bank loan as non-tax-deductible personal interest, whether it is used to pay for education or to buy a car. The interest on a home-equity loan is mortgage interest that is fully deductible for up to $100,000 if you meet the following two conditions: Your principal or second residence must be the security for your loan, and your home equity loan can’t be for more than the equity you have in your home – the difference between your home’s fair market value and the amount you still owe on the mortgage you got to buy your home.

Take a Loan on Your 401(k) Retirement Plan

Many parents choose to raise education money by using retirement assets. A loan on your 401(k) plan is like borrowing from yourself: You use your own retirement assets and pay the interest and principal back to your own plan account rather than to a lender.

Use College Town Real Estate

Instead of borrowing against your existing assets, consider borrowing to buy assets. This may work well if you find a good property in your child’s college town. You might consider a townhouse or condominium that your child can use while attending school. You can treat the property as your second residence and deduct mortgage interest and real estate taxes. After graduation, you can sell the property, perhaps even at a profit. The college property you choose might also be a larger building with good resale potential that can house your child plus some student tenants. You can treat this property as a business investment. Make your child the manager with real duties to get tenants, collect rents, handle repairs, etc., and pay him or her a reasonable salary. You can deduct the salary and any upkeep expenses, as well as the mortgage interest and property taxes while you own the property. After your child graduates, you can resell the property, again perhaps at a profit.

Give Your Child Appreciated Assets Or Income Property

If you have ample assets to pay for college, but are concerned about paying too much in taxes, you may want to consider gifting your child appreciated assets. You give some of those assets to your child, and let him or her pay the college expenses by selling the assets or using the income. You save taxes because if you sold the assets yourself or used the income to pay for college expenses, you would have to pay capital gains or income taxes at your rate. Your child’s rates will most likely be much lower. Any child age 14 or over pays no tax on the first $750 (in 2001) of investment income because of the standard deduction. Any additional income is taxed at your child’s own lower rate. If your child sells the appreciated assets you give him or her, the capital gains may also be taxed at his or her lower rate. You are allowed to give $10,000 ($20,000 with your spouse) to any one person per year without incurring any gift tax. Each of these college financing strategies carries a certain amount of risk. Your lender could foreclose if you fail to make home equity loan payments. If you don’t make 401(k) plan loan payments, there are heavy tax penalties, and you’ll be jeopardizing your retirement income. Real estate investments come with no guarantees. When you sell, you may not be able to recover your purchase cost. Of course, if you have a few years before your child will begin college, your best option is to begin saving in a tax-advantaged account such as a 529 Plan or Education IRA. You should talk to your professional financial advisor before you make a decision about how to raise the money to pay for education costs. ALAN S. MOORE is a Financial Advisor of Legg Mason Wood Walker, Inc., a diversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc.