A Survey Course in College Funding

Many parents have kicked off a new school year and their children are one year closer to heading off to college.  While that’s an exciting time in many households, it begs the question of how do I pay for it, and what incentives are out there?

It’s easy to get lost in the noise of the FAFSA financial aid form, different types of loans, and university’s sticker prices. Ultimately, most of the financial aid and tax benefits available to families sending someone off to college are tied to income and assets.

Having an idea of where you fall on the income spectrum can dictate planning strategies and determine which perks are available. With tuition and fees for private schools averaging almost $35,000 per year, and many state schools costing over $20,000 per year, every available efficiency helps.

Higher Earners

Married couples with over $200,000 in Adjusted Gross Income ($100,000 for single filers) are phased out of many educational tax breaks. For these earners, the most significant tax benefit available for college funding is the tax-free growth of a 529 Plan.

529 Plans allow you to contribute funds now, have them grow tax free, and withdraw funds tax free for education expenses. Each state has their own plan, although some states allow a small income tax deduction for contributions on the state tax return.

As you enter higher tax brackets, the benefit of tax free growth on your college investment adds up. Front-loading college savings to allow for long-term tax free growth can be quite advantageous.

In the high income range, the other main source of aid is the Parent PLUS Loan and unsubsidized student loans. Federal unsubsidized student loans often have favorable interest rates for student borrowers, while parents can often receive better rates than a PLUS loan through a home equity line of credit.

Mid Income Strategies

Families under $200,000 in Adjusted Gross Income may have access to additional perks. These include the American Opportunity Tax Credit (AOTC) which phases out between $160,000 and $180,000 in income (figures are halved for single filers). The AOTC can yield up to a $2,500 per year tax credit for each student. The credit is limited to undergrad students in their first four years.

At this income level, there may be the opportunity for tax deductions of student loan interest as well, or take the Lifetime Learning Credit if you’re ineligible for the AOTC.

Planning for middle income earners can be multifaceted. If you haven’t fully funded college savings in the 529 account, managing your income to stay eligible for the AOTC can be a significant tax perk. If paying for grad school or another course of study that doesn’t qualify for the AOTC, the Lifetime Learning Credit can be another savings option.

Lower Income Strategies

Funding college if your taxable income is quite low, typically well under $100,000 per year for married couples, can open the door to subsidized loans and grants. Grants, unlike loans, are not required to be repaid after graduation. And the government pays the interest on subsidized loans while you’re in school. Credits like the AOTC are partially refundable, so you can receive a refund even if you don’t pay federal income taxes.

Wrap up

At Vintage, we’re happy to meet with you and your soon-to-be college student to understand how far your savings will go, and what benefits you might be eligible for.

Paying for college can make an exciting time incredibly stressful. Understanding ahead of time what benefits are available given your situation can bring clarity to your college funding situation.

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