Schools award financial aid on the basis of either need or merit. The need for financial aid is defined as the gap between the annual cost of attending a particular school and the amount a family can be expected to contribute. Many schools use the School and Student Service for Financial Aid (SSS) to determine eligibility for need-based scholarships.

To determine your family’s eligibility, you will have to fill out an application for financial aid. Financial aid forms can generally be obtained from the school’s financial aid officer. Aid applications ask for information concerning the parents’ finances, such as the family’s net income and assets, number of dependents, age of parents, and the number of children attending tuition-charging schools and colleges. In addition, many schools request the most recently filed Federal income tax return.

The SSS analyzes this data, using a formula that takes into account food, clothing, and shelter costs for a household. On the basis of the remaining discretionary income, it will recommend an amount that your family should be able to afford for educational expenses. Within the limit of budgets—and according to individual financial aid policies—the schools will make final judgments on how much, if any, aid will be given. In most cases, applying for financial aid does not affect admission decisions, but early application is advised, since scholarship funds are limited.

Aid is also available in forms other than scholarships. Of the approximately 1,100 schools belonging to the National Association of Independent Schools (NAIS), many have loan programs for families with modest incomes, and some also offer low-interest loans to those with incomes between $20,000 and $80,000. Many more have installment plans that can ease the tuition bite, and some schools also offer campus employment as part of an aid package.

If financial aid is a major consideration for you in selecting schools, examine school figures detailing what percentage of students receive aid and the total amount given in scholarships or loans. Often, the older and more prestigious schools are heavily endowed and have the means to offer many scholarships.

Other schools have special scholarship endowments earmarked for students talented in the fine arts or athletics. Look for these if your child stands out in these areas. If you’d like more information on funding for a private school education, visit the NAIS website at

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If you’re thinking about ways to fund your child’s education, the Federal government has provided an incentive—the Coverdell Education Savings Account (Coverdell ESA), formerly known as the Education IRA. Contributions are not deductible, but tax-free withdrawals can be made when used to pay for eligible education expenses.

There are, however, income eligibility limits for parents who wish to open Coverdell ESAs for their children. The ability to make contributions phases out for single taxpayers with adjusted gross incomes (AGIs) between $95,000 and $110,000, and for married couples filing joint returns with AGIs between $190,000 and $220,000.

You may contribute up to a maximum of $2,000 annually per child before the designated student reaches age 18. For gift tax purposes, contributions fall under the annual gift tax exclusion limits for singles and married couples ($14,000 and $28,000, respectively, in 2016). Be sure to keep in mind that, if you also contribute to a 529 plan for the same child during the same year, you will need to add these gifts together to determine your gift tax filings.

There is no limit to the number of accounts that may be held in the child’s name or the number of people who may make contributions to a Coverdell ESA—as long as total contributions remain within the $2,000 annual limit per child. If multiple accounts are established and more than $2,000 is contributed in total, the excess is subject to a 6% excise tax penalty. You can, however, eliminate the penalty by withdrawing the excess contributions (and any earnings) before the due date for the beneficiary’s tax return for that year. The withdrawal would be considered income, and it would be subject to taxation.

Coverdell ESAs can be used to pay for more than just college expenses. Funds can also be used to pay for elementary and secondary school expenses, including the purchase of computer systems, educational software, and Internet access for the child.

A Few Holds Barred

The beneficiary must spend a Coverdell ESA by his or her 30th birthday. If the designated child does not use the funds for educational purposes by that age, the account may be rolled over for use by another member of the family who is under age 30. Withdrawals from a Coverdell ESA that are not used for qualified education expenses may be subject to both income taxes and a 10% penalty.

Finally, if you’re hoping your child qualifies for financial aid in college, you may want to think twice about setting up a Coverdell ESA. It’s important to note that a Coverdell ESA must be set up in the child’s name. Financial aid formulas, in determining how much a family can afford to contribute to the cost of college, count assets held in a child’s name much more heavily than those held in the parents’ names.

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