Planning to Pay for College?

Written by Stacie Rhodes

Originally published in Lynchburg Business Magazine.

5 THINGS YOU MAY REGRET NOT DOING

Recent CBS reports have highlighted that America’s college loan crisis continues to build as student debt has surpassed $1.5 trillion dollars. While the number of loan applications has decreased by 20 percent, total student debt has increased by about $500 billion due to rising costs of education and poorly structured repayment plans.

Yet, despite this national crisis, the National Center for Education Statistics says enrollment in American colleges and universities will rise to 20.5 million students by fall 2027. The need for a strategic college savings plan has never been more apparent or imperative. Below are five action items that could become regrets or game changers:

1. Establish 529 accounts for each student as early as possible—529 plans, officially known as “qualified tuition plans,” are tax-advantaged plans designed to encourage saving for future educational costs. Withdrawals from these state-, state agency-, or educational institution- sponsored plans are not federally taxable as long as the withdrawn amount is spent on qualifying expenses. Understanding and following the rules for spending are important as detailed records must be submitted to the IRS. However, the benefits are well worth the effort of record keeping.

Contributions—Parents can save up to $15,000 per parent per year in a 529 account, or $30,000 per couple, and grandparents can also contribute up to $15,000 per person per year. While contributing more than $15,000 per person would need to be reported to the IRS as a gift, a 529 account can be “superfunded” with contributions of $150,000 per couple (or $75,000 per person)—effectively using up an individual’s federal gift tax exclusion for five years.

Qualifying expenses—As of 2018, tuition expenses for elementary, middle, and high schools (private, public or religious) are qualifying expenses for 529 funds. However, not all expenses will qualify as funds must solely be used for expenses related to education. For example, while tuition and fees are considered required expenses, the cost of room and board do have restrictions. Additional qualified expenses are as follows: tuition, fees, books and supplies, equipment required by the school, room and board, and computers (including tablets) and peripherals (such as printers and software).

2. Start the college conversation as early as freshman year of high school—While it may be hard to imagine a 15 year old knowing what type of college they want to attend, intentional conversations about college choices and funding are key and keep everyone on the same page. Provided are a few questions to start the conversation: What does your student want from college? How much will the student be responsible for? Will they be expected to work? Will they need to take out student loans? How do student loans work? What do student loans mean for the student’s financial future after graduation?

3. Complete a FAFSA form every year, starting their senior year of high school—The Free Application for Federal Financial Aid (FAFSA) is usually available each fall. This application is important to anyone with senior high school students and/or current college students, regardless of the family’s financial situation. In an analysis by NerdWallet, a total of $2.3 billion in free federal grant money was leftover in 2017 as more than 1.2 million high school graduates did not complete a FAFSA application. Within two weeks of completing a FAFSA application, a Student Aid Report is provided, displaying the Expected Family Contribution. This number targets the amount the family is expected to pay for the colleges and/or universities identified by the individual.

4. Take advantage of education tax credits—The two most common education credits are the American Opportunity Tax Credit and the Lifetime Learning Credit. While only one credit can be claimed for a student each year, the reduction to the family or individual’s tax liability can be very advantageous.

The American Opportunity Tax Credit offers a $2,500 credit (reduction to the tax liability) for $4,000 in qualified expenses. This tax credit matches the first $2,000 qualified expenses dollar for dollar and then 25% of the next $2,000. Thus, if an individual spends $4,000 of their own money (not 529 funds), they will receive a $2,500 tax credit. To qualify for the full credit in 2018, the adjusted gross income for single parents must be $80,000 or less, or $180,000 or less for those married and filing jointly. The total credit cannot exceed $2,500 and can only be claimed for 4 years. Qualified expenses for this credit do not include room and board but overlap some of the expenses that the 529 funds would cover. Therefore, consider securing this tax credit first before spending the 529 funds.

The Lifetime Learning Credit has no limit to the number of years it can be claimed. It provides up to a $2,000 tax credit on the first $10,000 of college expenses. The adjusted gross income for a single filer must be $57,000 or less or $114,000 if married and filing jointly.

5. Exhaust scholarship searches and applications—Opportunities for scholarship money are numerous. While the work is tough, the reward can be significant. The Big Future website, through collegeboard.org, provides information about free scholarships, other financial aid opportunities and internships from more than 2,200 programs that total nearly $6 billion. Also, nonprofit Thrivent (www.thrivent.com) has resources that provide free scholarship research tools for students who are willing to put in the time to search and apply for award money.

If you want to prepare to pay for college, contact HSC Wealth Advisors for more information.