- Earnings, savings, and investments. These should be prioritized.
- Scholarships and fellowship grants (merit based). These should be prioritized.
- Financial aid:
- Grants: Financial need based. Including Pell Grants, Teacher Education Assistance for College and Higher Education (TEACH) Grants, Federal Supplemental Educational Opportunity Grants (FSEOGs), state grant programs, and institutional grant programs.
- Loans:
- William D. Ford Federal Direct Loan Program. Including Direct Subsidized Loans subject to financial need, Direct Unsubsidized Loans, Direct PLUS Loans for parents and graduate or professional students, and Direct Consolidated Loans.
- Private loans.
- Home loans. Including cash out refinances of home mortgages, home equity loans, or home equity lines of credit (HELOCs).
- Federal Work-Study Program: Financial need based.
- Tax strategies:
- Tax deductions:
- Student loan interest deduction. Applicable to room and board expenses with limitations. Subject to modified adjusted gross income thresholds.
- Business deduction for work related education.
- Tax credits: American Opportunity Credit and / or Lifetime Learning Credit. Both are subject to modified adjusted gross income thresholds.
- Tax advantaged accounts:
- Section 529 college savings plans are favored, also known as qualified tuition programs or QTPs. “Superfunding” or accelerated lump sum gifting credited ratably over 5 years on IRS Form 709 and / or gift splitting should be strongly considered. Dependent student owned custodial accounts or parent owned accounts are considered parental assets for financial aid purposes with minimal impact on financial aid eligibility. Independent student owned accounts are student owned assets with a larger impact on financial aid eligibility. Qualified distributions from student or parent owned accounts do not impact financial aid eligibility. Accounts owned by anyone else are not considered assets but distributions are considered student untaxed income for financial aid purposes. Not subject to any income thresholds. Applicable to room and board expenses with limitations.
- Coverdell education savings accounts, also known as Educational IRAs, may be considered in specific and limited scenarios. Rollover of funds into Section 529 college savings plans should be considered. Subject to thresholds for age and modified adjusted gross income. Similar financial aid eligibility considerations as Section 529 plans. Applicable to room and board expenses with limitations.
- Traditional and Roth IRAs may be considered for education funding in specific and limited scenarios. Use scenarios potentially include child owned Traditional IRAs for education funding. Applicable to room and board expenses with limitations. Withdrawal from parental IRAs for child education funding or from adult IRAs for adult education funding is strongly discouraged.
- U.S. savings bonds: Series EE and I bonds. Subject to thresholds for modified adjusted gross income, age, and tax filing status.
- Custodial accounts for minor children: UTMA and UGMA accounts. Use is strongly disfavored for education funding due to “kiddie tax” implications, transfer of asset control to the child upon achieving the age of trust termination, and adverse financial aid eligibility implications as UTMA and UGMA assets are considered student owned assets.
- A hybrid tax approach may prove superior. Note that only one tax strategy can be utilized to offset the same qualified education expense dollars; no double benefit allowed.
- Tax deductions:
- Employer provided education funding assistance. This should be prioritized.
- Recognize priorities: Prioritize earning, saving, and investing to achieve education funding goals. Financial aid eligibility considerations should not influence earning, saving, and investing goals and plans.
Life insurance as a funding vehicle for qualified plans
Any qualified plan may purchase life insurance so long as life insurance does not represent the primary focus of the plan, but rather represents an
Bentley Makkar
December 14, 2024
No Comments