Navigating the big decisions together

Financing a college education requires more than completing a FAFSA each year. If a student qualifies, federal grant and loan programs only provide limited funding amounts which often leave a significant affordability gap. I believe families need to consider the four-year cost of attendance when applying in order to avoid the heartbreak of a student being accepted into their dream college and not being able to afford it.

Paying for a four-year college education is a daunting task that most often requires numerous funding sources. There is not a one size fits all approach when paying for college. The expertise of a financial professional who understands how the FAFSA is calculated, tax planning, and investments such as 529 plans is a very important partner. I have had experience with many families that have specialized circumstances such as upcoming retirements or the need to know how to best allocate a 529 plan. Most often the expertise of an experienced financial planner who understands FAFSA calculations is needed in these cases.

I am excited to welcome Trina Brown as a coauthor to this blog and her expertise as a CERTIFIED FINANCIAL PLANNER™ Practitioner at Allegheny Financial Group in Pittsburgh, Pennsylvania.  So many families think of Federal grants and student loans as the starting and ending point for college affordability. Trina shares some important financial strategies for 529 plans and tax planning possibilities during a student’s college years.

Let’s begin with the popular but often confusing 529 plans that many families have for their children. For starters, many parents wonder if the 529 plan should be in the name of the parent or the student.

Should the 529 plan be in the name of the parent or the student?

Titling of 529 plans – The FAFSA is completed annually and the 529 plan money is treated differently depending on who owns the account. If the 529 plan is owned by the student or the parents, the assets are counted as the parents’ asset for the FAFSA application. This means that 5.64% of the assets are counted towards the expected family contribution. Distributions made from a plan titled this way receive favorable treatment and are not included as income for student aid purposes.  

However, if the 529 plan is owned by anyone other than the parents or student, like a grandparent, things are handled differently. The plan’s assets will have no effect on the FAFSA, but the distributions are treated as student income, which is assessed at 50%. So hypothetically, if a grandparent took out $10,000 to pay for their grandchild’s tuition, the student’s eligibility for financial aid could be reduced by $5,000! 

Key Takeaway: The FAFSA looks at the income of the student from two years prior, so wait until the final years of college to use money from a 529 plan owned by grandparents and other family members.

Will tax planning strategies be a benefit to offsetting tuition increases or lowering loan amounts?

The American Opportunity Credit – Formerly known as the Hope Credit, this is a tax credit available for the first four years of a student’s undergraduate education, provided the student is attending school at least half-time in a program leading to a degree or certificate. The credit is worth up to $2,500 in 2020 (it’s calculated as 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of expenses). The credit must be taken for the tax year that the expenses are paid, and parents must claim their child as a dependent on their tax return to take the credit.

One benefit of the American Opportunity credit is that it’s calculated per student, not per tax return. So parents with two (or more) qualifying children in a given year can claim a separate credit for each child (assuming income limits are met)

Is it possible to deduct student loan interest?

Student loan interest deduction – This allows borrowers to deduct up to $2,500 worth of interest paid on qualified student loans. Generally, federal student loans, private bank loans, college loans, and state loans are eligible. However, the debt must have been incurred while the student was attending school on at least a half-time basis in a program leading to a degree, certificate, or other recognized educational credential. So loans obtained to take courses that do not lead to a degree or other educational credential are not eligible for this deduction.

Also, to be eligible for the deduction, an individual must have the primary obligation to pay the loan and must pay the interest during the tax year. The deduction may not be claimed by someone who can be claimed as a dependent on another taxpayer’s return. Borrowers can take the student loan interest deduction in the same year as the American Opportunity credit or Lifetime Learning credit, provided they qualify for each independently.

Key Takeaway: Your ability to take the student loan interest deduction depends on your income. For 2020, to take the full $2,500 deduction (assuming that much interest is paid during the year) single filers must have a MAGI of $70,000 or less and joint filers $140,000 or less. A partial deduction is available for single filers with a MAGI between $70,000 and $85,000 and joint filers with a MAGI between $140,000 and $170,000.

These are just a few uncommonly discussed strategies that families may utilize when paying for college. When families allocate tax planning savings back into the college budget it can certainly ease the overall affordability. As always, the blog content is shared for informational purposes and you should consult with a financial professional to ensure you are making the best financial decisions for your unique family situation.

So when you think about paying for college, are you considering all the funding possibilities for your family?

About the guest coauthor Trina Brown:

After 20 years in the IT field Trina Brown, CFP® left the technology profession to pursue financial planning because she could see that there was an enormous need for sound, practical financial education, and advice. “So many people I worked with made good money but had nothing to show for it but car payments and Coach purses,” says Ms. Brown. Personal finance is her passion and her mission is to educate and advise as many people as possible so they can achieve balanced and healthy financial lives, drawing on the disciplines of behavioral finance and financial psychology to help them plan for the future and enjoy the present. She is a member of the Financial Planning Association and the Financial Therapy Association.

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