Minimizing College Costs
The average yearly cost of tuition in 2024 depending on whether you end up in an Ivy league school or public campus can range from $27,330 to $78,970.
Over a 4 year period, this could be as low as $109,320 or as high as $315,880.
& this is just for one child!
Further, since 1980 the cost of higher education has increased by 213% while over the same time general inflation has risen by 187% leading to borrowers collectively owing over $1.7 trillion in student loans.
Seems a bit problematic (but I’ll digress) & without a end in sight, begs the question:
How can you minimize what you pay for your child’s college expenses?
First, consider the bigger picture college planning process:
You’ll need to:
Pre-plan education costs, budget and save
Apply to become accepted in one of your selected schools.
Complete the FAFSA
Consider tax planning opportunities to minimize out of pocket cost
Consider smart lending strategies
Appealing for more scholarships
Each step is important, let’s dive in.
Before college was the equivalent cost of a mortgage (& some) you could begin to think about this while your children were in high school - this is no longer the case (sadly).
Planning for college should start when your child is born (or sooner if you’re savvy).
Sure, there’s the possibility they don’t go but consider that a future blessing if it happens.
Consider the below framework for how to pre-plan your education costs:
Total parents 529/brokerage assets (as of today)
Monthly 529/brokerage asset contributions
Parent & student planned monthly cash flow (allocated towards college expenses)
Total student pledged assets
Monthly student contributions
Total grandparent/other help
If your child is 10 years away from college, use a future value calculator/excel to determine what the total value of what your college funding pool could look like.
Compare this to the future value cost of education which you can approximate by using some value between today’s cost of an in-state public school or an Ivy league school grown at an inflation rate of 4.84% based on the number of years your child has until they start school.
The difference is your gap of what you will have saved versus what you would need to have saved.
The gap can be closed by:
Increasing savings rates between now & college funding years
Student/parent student loans
Merit-based scholarships
Private grants
Financial aid assistance
When considering financial aid assistance, we need to talk about the Free Application for Financial Student Aid (FAFSA).
When you’re accepted to a school, around October you’ll fill out the FAFSA to create your financial profile which is used to calculate your Student Aid Index (SAI) to determine the amount of aid you’d be eligible for.
Consider the SAI formula below:
If you’re looking for a good SAI calculator - CLICK HERE.
The way the formula works is:
Cost of attendance - student aid index (SAI) = financial aid needed
What’s important to note regarding income is it’s easy to think that if you’re a high income earner that you’re automatically not going to get any financial aid.
That is NOT true.
Considering solely the income above, if you’re a family with 3 children and $250,000 of income the SAI will assume that you can pay $58,503.
So using the SAI formula:
If the school you’re attending costs $75,000, minus your SAI of $58,503, you would be eligible for $16,497 of aid.
The FAFSA will determine your need-based financial aid.
Some schools are merit-based and other schools are need-based for their financial aid policy.
Merit-based aid meaning based on student achievements such as academic performance, extracurricular activities, athletics, leadership, artistic talent, etc.
Need-based aid meaning based on students' financial need (as measured above).
There is no standard - each school is different for how they award aid.
It’s tough to determine merit-based scholarships and private grants because their applicability are unknown in saving for college but you can include/exclude them based on your acceptance of the risk of underfunding (or overfunding) college expenses.
Idea being - we’re trying to best approximate your net costs of college tuition.
When it comes to tax planning strategies to minimize the cost of education, you could consider gifting appreciated securities to your child to sell.
When your child has taxable income remaining in the 12% bracket $47,150, their capital gains rate is 0%.
Meaning, you could gift appreciated securities to your child, the cost-basis carry’s over, they can sell the securities and provided they’re under $47,150 of taxable income, they pay 0% in tax on the gain.
Considering an example, if you own $50,000 of apple stock and your basis is $10,000, that’s a $40,000 gain, at 15% capital gains tax rate that’s $6,000 in tax. When you gift that to your child (assuming they make $7,125 or less) they can realize that entire gain at 0% (note, the gift over $18,000 reduces the parents lifetime state exemption - no tax due for them immediately but provided when they pass they have an estate over the estate exemption they could owe estate taxes).
Also - this assumes your child is not a dependent for tax purposes.
If they are, then this sale is subject to Kiddie tax and any value over $2,600 is taxed at the parents marginal income tax rate.
You could however realize this $2,600 of 0% capital gain in your child’s name & if you have multiple children, this is something you could realize for multiple children.
Something to keep in mind is that if you do this every year then your child will have a small accumulation of unearned income which would eat into their $2,600 exemption that any dollar amount above is taxed at your parent marginal tax rate, so this ability would decrease slightly for each year you try to deploy this.
Provided your child is above the age of majority and lives away from you for more than half the year and financially supports more than half of their own living expenses then they may be able to qualify as independent on their tax return instead of a dependent and the kiddie tax rules no longer apply to them.
Being a child that is independent for tax purposes & is paying for school is now eligible for the American Opportunity Tax Credit (AOTC) which is a $2,500 max credit designed to help offset the cost of higher education.
The credit covers 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000.
Further, up to 40% of this credit (or $1,000) is refundable. Meaning, that even if the taxpayer (the child) has no tax liability (more likely than not), they can receive a portion of the credit as a refund.
Don’t plan for your child to pay for school?
No problem.
You and your spouse each have the ability to give your child $17,000 as a gift, of which the child can then use to pay for qualified education expenses, which can be used for the AOTC tax credit, which have the potential to offer a refundable $1k at the end of the year.
If you’re a business owner, you would consider hiring your child (provided they’re doing legitimate work in your business) & income they earn that’s $14,600 or less, they pay 0% tax on (as this is the standard deduction for a single filer).
In action, this could mean that if you’re in the 37% marginal bracket with a 6.60% state tax for one child who earns $14,600 and pays 0%, this is $6,365 in tax savings.
Another opportunity for business owners is IRS Section 127 Educational Assistance programs which would allow for $5,250 per employee per year in tax-free educational assistance benefits.
Provided some of the requirements for this plan is for the children of the owner to be age 21 or older and independent for tax purposes - places the useability of this plan into the student’s junior or senior year.
Even still, the two-year benefit of this plan could be advantageous.
Consider to get $5,250/yr of after-tax spending in the 32% tax bracket, you’d have to pre-tax pay yourself $6,930 to net $5,250 (ignoring state, local, & FICA taxes).
Then contrast this to the same savings to the child of $1,680, that’s $3,360/yr of tax savings to the business owner.
Granted - this would work best for solo-owners and minimal employees or this pure tax savings would be reduced by the dollars given to employees (which can be looked at similar to paying tax).
Next, when it comes to lending strategies for college, your child is capped on what they’re able to borrow from the Federal Direct Stafford program. These loans are at more attractive rates, currently 5.50% but have a max of $27,000 over 4 years ($5,500, $6,500, $7,500, $7,500).
These loans can be subsidized (needs based) or unsubsidized (not need based) - meaning interest is paid for subsidized loans from the department of education while you’re in school and accrues while you’re in school for unsubsidized loans.
Parent borrowers on the other hand, can borrow an unlimited amount. These are Parent PLUS loans and have higher interest rates where interest accrues immediately.
Lastly, you can ask your local bank for a private student loan to help fund the difference of which rates are typically the highest (as this is an unsecured loan from a not-as-forgiving lender).
Your federal loans have repayment options that are based on income - these are called income driven repayment plans. There are 5 income driven plans to choose from and because of this ability to repay based on income, they’re more forgiving and attractive.
These loans are also eligible for long-term loan forgiveness and public service loan forgiveness (PSLF) which make these loans more favorable than traditional lending.
Note - long-term loan forgiveness is after 20-25 years of repayment (depending on the plan you’re on) and after the payment term is up, the loans are forgiven but taxable as income.
Typically, borrowers who have double the amount of loans relative to their income are good loan forgiveness candidates (excluding PSLF eligible borrowers).
It’s important to note that Parent PLUS borrowers are not eligible for income driven repayment plans unless they consolidate their federal loans.
Provided they do consolidate, then the only plan they’re eligible for is the income contingent repayment (ICR) plan - of which, is the most unattractive income driven repayment plan. Leaving Parent PLUS borrowers will a lot of an unattractive repayment schedule.
But for undergraduate students, this can also be a great way to build credit history (even if you’re the parent who will be funding school - you can help them repay this loan and build their credit at the same time).
One last item to consider when minimizing your education cost is analyzing and appealing award letters from your college.
Say you get a letter in the mail stating that you got a $20,000 merit scholarship for the school you want to attend but you also got a $25,000 merit scholarship from another school.
You can make a competitive appeal to the school you actually want to attend providing the proof that you have the opposing school gave you an extra $5,000.
Tactically, once you’re accepted into one school that you like, you could also apply for competing schools who are competing for a similar pool of candidates - if you get back award letters that offer higher scholarships - you can write a letter and appeal.
The worst they say is no.
All this it say that if you’re successful in gifting assets, shifting income, utilizing section 127, using AOTC, and successfully appealing for more aid, all these strategies combined have the ability for you to save $50,000 or more off the sticker price of education.