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tax breaks for college

In recent years, Congress has passed a series of tax incentives to help families meet higher education costs. Some of the incentives are provided when a child is in school and bills are due, while others come through savings plans before children begin college. The various incentives are complicated, with details of one affecting details of another. Below is a chart summarizing the tax breaks.


Incentive Savings Restrictions
Vermont Higher Education Investment Plan

Vermont's "529" program
  • Vermont tax credit of up to $250 per child per year beginning January 1, 2007.
  • Contributions are not tax-deductible, but earnings are tax-free.
  • Withdrawals tax-free if used for qualified higher education expenses.
  • Cannot claim Hope or Lifetime Learning credit for same expenses for which a "529" program distribution was used.

Hope credit
  • Tax credit of up to $1,650 per student for first two years of college.
  • Phases out as modified adjusted gross income exceeds $48,000 ($96,000 if married, filing jointly). See IRS publication 970 for guidelines.

Lifetime Learning credit
  • Tax credit of up to $2,000 per family for an unlimited number of years.
Tuition and fees deduction
  • Deduction of up to $4,000/year for tuition and certain related expenses.
  • Targeted to middle-income parents who may not qualify for Hope and Lifetime Learning tax credits. See IRS publication 970 for guidelines.
  • Cannot claim this deduction if you take a Hope or Lifetime Learning credit for the same student.

Coverdell Education Savings Accounts (ESA)

formerly called Education IRAs

  • Contribute up to $2,000/year/child.
  • Contributions not tax-deductible, but earnings are tax-free.
  • Withdrawals tax-free if used for qualified higher education expenses.

  • Cannot claim Hope or Lifetime Learning credit for same expenses for which an ESA distribution was used.
  • Generally available to joint filers with adjusted gross income of $220,000 or less. See IRS publication 970 for guidelines.

Roth IRA

  • Contribute up to $5,000 for tax year 2008; contributions are not tax-deductible, but earnings are tax-free if held until age 59½.
  • Early withdrawal for college expenses allowed.

Traditional IRA

  • Contribute up to $5,000 for tax year 2008; contributions are tax-deductible.
  • Withdrawals for college allowed, taxed as ordinary income.

Student loan interest deduction
  • Tax deduction for interest on student or parent education loans.
Education Savings Bond Program
  • Interest on certain savings bonds may be tax-free if bond is used to pay education expenses.
  • Phases out as modified adjusted gross income exceeds $65,600 ($98,400 if married, filing jointly). See IRS publication 970 for guidelines.

Additional information is available at:

Visit the VSAC Resource Center at 10 East Allen Street in Winooski for these forms, or contact the IRS directly.


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