Even if you can pay for college, should you?

Let’s talk about college costs BEFORE you need to (proactive vs. reactive) and avoid the “we’ll figure it out when we get there” mentality.

Remember, unlike retirement, you can’t move that goal post with college.

College costs

The sticker price is irrelevant! There’s no reason to pay full price.

• Merit scholarships and need-based grants pay for over 31% of college*
• Private colleges discount their tuition by 56.2% on average**

*Source: Sallie Mae, How America Pays for College 2019

**Source:  National Association of College and University Business Officers, 2022 NACUBO Discounting Study.

But how do you determine your net cost? We need to figure out how to fund the gap.

Financial aid applications

Even if you want a merit scholarship, you may still be required to submit these applications. The majority of schools accept the FAFSA. The CSS profile, on the other hand, is required by select elite colleges.

The FAFSA pulls in info from the IRS; however, the CSS is more complicated.

Here are a couple of FASFA formula basics:

• Retirement assets are not counted
• Student assets are counted unfavorably. Many clients want to set up brokerage accounts for their kids vs. contribute to their 529 account. Assets in the student’s name are disadvantageous in the FAFSA formula.

How can you cut the cost of college?

Let’s look at the two most common quadrants we encounter with our clients. Quadrants not noted here are where the student may have High or Low Merit coupled with a High Financial Need.

Tax Aid

Said another way, how can we maximize your tax capacity?

Tax credits are often challenging to qualify for; the American Opportunity and the Lifetime Learning credits both have a 100% phaseout if your MAGI exceeds $180K. If you can switch from Roth to pre-tax 401(k) contributions to dip below this threshold, that may be a viable consideration.

The Kiddie Tax is another thing to consider when setting up investment accounts in a child’s name. In 2024:

• The first $1,300 of unearned income is tax-free.
• The next $1,300 of unearned income is taxed at 10%.
• Any unearned income above $2,600 is taxed at the parent’s marginal rate.

Remember, the kiddie tax rules do not tax income from a 529 plan.

Could you gift your kids an appreciated security over a period of time while they’re in a 0% capital gains bracket?  Yes! The key here is to gift the appreciated security but sell it over a staggered period so the child isn’t subject to kiddie tax rules (i.e., keep the realized gain below $2,600 in 2024, for example). The benefit? You have increased liquidity to pay for college with a lower tax bill (and yes, this means the child never really receives the “gifted security”). Doing this over a 5-year period for multiple kids can add up! This gifting and liquidation strategy is especially beneficial if you have vested equity compensation.

Lastly, hiring your child may save you on your total tax bill, but you need to get your CPA on board. Again, the goal is to save on your total tax bill and use those funds for college education.

What’s the value of tax independence

If you’re a high-income earner, claiming your child on your tax return may not be materially advantageous. Once they’re 18, is it worth it for your child to become tax-independent?

To do this, they must support more than half of their own financial expenses through wages, investment income, and assets (which can be gifted).  And yes, this means they’re on the hook for 50% of their college expenses. This will allow them to:

• Take advantage of the American Opportunity Tax Credit.
• Benefit from the IC Section 127 Education Assistance Plan.
• Avoid Kiddie tax rules; they pay at their rate, not their parent’s rate.

Smart lending strategies

With a loan, it may be more digestible to consider paying for a four-year degree over eight years. How would you use the extra cash flow (i.e., continue retirement savings, maybe you have multiple children enrolled at once, etc.)?

• Federal Direct Stafford Student Loan
  • You must fill out the FAFSA to access this!
  • The student applies for aid using their parents’ information; this is an excellent consideration if you want your student to have “skin in the game.” The parents can choose to assist with the loan payments.
  • You can use up to $10K in a 529 to pay this off.
  • If you plan to work for a non-profit or a medical facility, this loan is eligible for forgiveness (PSLF).
  • The rate is fixed and resets every July 1^st.
  • $27,000 is the max over four years. This frees up cash flow (not a bad idea)!
• Federal Direct Parent PLUS loan (not need-based)
  • Avoid them if you can.
  • High fees and high rates; this loan is usually disguised as additional aid.
• Private Student Loan – (not need-based)
  • Avoid them if you can.
  • A co-signer is typically required.

Closing Thoughts

Another consideration would be the student’s willingness to be a resident assistant, which may considerably reduce the cost of housing.

Also, ANYONE can contribute to a 529. It can even be in the grandparent’s name, but the beneficiary matters.

Book recommendations:

• How to Pay for College: A complete financial plan for funding your child’s education
• Where You Go Is Not Who You’ll Be: An Antidote to the College Admissions Mania
• The Price You Pay for College: An Entirely New Roadmap for the Biggest Financial Decision Your Family Will Ever Make

Let us know if you want to discuss your education strategy further. Feel free to book some time with us here.

Please consult with your financial advisor and/or tax professional to determine the suitability of these strategies. All views, expressions, and opinions in this communication are subject to change. This communication is not an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.