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Paying for College - Fact Sheet

Paying for College - Fact Sheet

Kevin Goulding, MBA, CFP® 

Problem Statement

College is expensive. Tuition & fees at a 4-year private college is $32,410 per year now1. In 10 years, the total cost with room & board at a four-year private college could be over $350,0002.

Paying for college is the #1 concern for clients (according to Capstone Wealth Partners).

The Cost of Higher Education

Including Room & Board, the average annual cost of college is currently:

$33,858 for UC Irvine3

$54,500 for University of Arizona4

Living at home and attending a local Community or State College for the first couple years is significantly less expensive. So, a question for many parents are facing is…”Do I want to postpone my retirement 3+ years in order to send Johnny to his dream school?”.

While the cost of college seems onerous, there are strategies available that can help make it an achievable goal. For example, college can be funded with a combination of:

  • financial aid and student debt

  • cash flow and tax credits

  • 529 plan assets and other savings

Paying for College

529 plans are only one tool in the financial advisers’ tool chest to help clients achieve their college funding goals. Other college funding sources include:

* Scholarships & Financial Aid

* Tax Credits: AOTC, LLC

* Student & Parent Debt

* Student & Parent Savings

* 529 Plans

* Student & Parent Cash Flow

* Coverdell, UTMA/UTGA

* Grandparents

Student Debt

A word of caution: It’s easy to take on debt to pay for college and nearly impossible to relieve yourself of the obligation. If you co-sign on a student loan, you obligate yourself to pay that loan in the event the student is not able to. You can’t escape that obligation through bankruptcy; your wages (or Social Security payments) can be garnished to collect on your child’s student debt.

Student Loans: Federal Direct Student Loans – 4.4% interest rate

        • Best option - No cosigner

        • Limited to $27,000 max, $5,500 to $7,500 per year

        • Use it or lose it

Federal Direct Parent PLUS – 7% interest rate

  • Not a great option, beware of origination fees!

Private Student Loans – parents co-sign

  • May be the costliest option

Rule-of-Thumb: Total Student Debt should not exceed their first year’s earnings

Be aware: For every $10,000 borrowed, payments will be about $100 every month

Financial Aid

Rule of thumb: Parent’s Expected Financial Contribution (EFC) is 20% - 25% of income

FASFA: Free Application for Student Financial Aid

  • Includes all non-retirement-based assets, home equity NOT counted

  • Only considers custodial parent

  • The base year is the most important5

  • Consider repositioning student’s assets6

Scholarships: Sources of Scholarships:

  • 90% are from institutions7

  • Only 1% for athletics8

Types of Scholarships:

  • competitive – based on grades, scores, etc.

  • grid/automatic - if you score higher on the ACT you get more $s

  • package - for small private schools

Need-based Scholarships:

  • First-come, first-served

  • Apply early before funds run out; Income important

529 Plans – How they work

Funding: Contributions are typically made on an after-tax basis and can be supercharged with 5-year gift tax averaging without requiring gift tax reporting up to $150,000 per student (i.e. $15,000 x 5 years x 2 parents).

However, it’s unlikely that gifts over the $15,000 annual gift tax reporting threshold will trigger gift tax since the Estate tax limit is $11.4M now.

California plans cumulative contribution limit is $529,000 per beneficiary.

Control: Typically, the plan is owned by the parent (or grandparent) for the benefit of the child (or grandchild).

Benefits: The fundamental benefit of 529 plans are that accumulated earnings can be used for qualified educational expenses tax-free.

Some states (other than CA) provide additional incentives such as:

  • making contributions tax deductible

  • providing tax credits for contributions

Clients with higher income (and higher federal and state marginal tax rates) will benefit more from the tax avoidance provided by 529 plans. Clients subject to the Medicare Surtax (3.8% in 2019) benefit more still.

Recent changes to the tax code have expanded the use of 529 funds to allow for annual withdrawals of $10,000 per student for K-12 educational expenses (not including room & board).

Investments: Target date funds that use a “glide path” to reduce equity exposure as college approaches are a popular choice.

American funds offers two different share choices:

  1. "A" shares have 4.25% upfront fees (3.5% goes to Advisor) and 0.71% Expense Ratio (25bps 12B-1 fees goes to advisor)

  1. C” shares have no upfront fees and 1.47% expense ratio.  More cost effective for Target dates < 6 years

State Plans: Fund choices are State-based.

Some states offer incentives for buying in-state plans while others allow state incentives with out-of-state plans (i.e tax parity).


What if Johnny doesn’t go to college?

529 & Coverdell funds can be transferred for the benefit of another family member (including the parents).

The earnings portion of a non-qualified distribution is taxed at the beneficiary’s rate and is subject to a 10% federal tax penalty.

Do 529 & Coverdell plans affect financial aid?

Yes, but at a more favorable rate.

According to the College Savings Plans Network, parents are expected to contribute about 5.6% of the assets saved in a 529 account each year that a child is in college.

By contrast, 20% of the money in a custodial account which belongs to the child (eg. like UTMA/UGMA accounts) must be counted toward the family's annual college contribution.

How do 529 plans compare to Roth accounts for funding college expenses?

While Roth account earnings can be withdrawn before 59 ½ for qualified educational expenses without incurring the 10% penalty those withdrawals are still subject to ordinary income tax.

Are there any advantages of investing in California based 529 plans for CA residents?

California does not offer residents a state tax deduction for 529 plan contributions, so shop around9.

Other Ways to Help Pay for College

Qualified Educational Assistance (Section 127)

A business owner may be able to create an educational assistance plan and exclude up to $5,250 paid or incurred on behalf of an employer from the wages of each employee, if certain requirements are met. The education may be at undergraduate or graduate level, and is not required to be job-related. IRC §127

Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA)

If you open a savings account for your minor child under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), your child actually owns the account.

As custodian of the account, you'll maintain control over the funds until your child reaches the age of majority. Your child (as owner of the account) is taxed on the earnings the account makes ... not you. 

Even though you are not responsible for paying taxes on the earnings from your child's UGMA/UTMA, you can choose to pay these taxes on your child's behalf.

Coverdell education savings account (Coverdell ESA)

A trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account. This benefit applies not only to qualified higher education expenses, but also to qualified elementary and secondary education expenses. There are certain requirements to set up a Coverdell ESA:

When the account is established, the designated beneficiary must be under the age of 18 or be a special needs beneficiary.

Contributions must be made in cash, and they're not deductible.

Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions.

If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary.

Phaseout begins at $95,000 for individuals and $190,000 for joint returns.

Total contribution to all accounts on behalf of a beneficiary in any year can't exceed $2,000.

American Opportunity Tax Credit (AOTC)

Phase out starts at $160k for MFJ filers. Income over $180k 100% phased-out

You spend $4,000 on qualified educational expense (each of the 1st four years)

You get 100% of 1st $2,000 spent $2,000

25% of next $2,000 spent $ 500

$2,500 per year, per student

No “double-dipping” with 529 spending


Budgeting for college:

$24,000   529 Savings Plan Balance

$10,000   Monthly 529 Plan Contributions $200 x 50 months (until college starts)

$34,000   Total 529 Savings at the start of college

$10,000   Parent pledged assets

$19,200   Parent pledged monthly cash flow $400 x 48 months (college duration) 

$10,000   American Opportunity Tax Credit 

$10,000   Student Pledged Assets

  $9,600   Student Pledged Cash Flow $200 x 48 months (college duration) 

  $5,000   Grandparents’ contribution 

$98,000   TOTAL FUNDS AVAILABLE (without student loans)


College Board

An American not-for-profit organization that was formed in December 1899 as the College Entrance Examination Board (CEEB) to expand access to higher education. While the College Board is not an association of colleges, it runs a membership association of institutions, including over 6,000 schools, colleges, universities, and other educational organizations.

The College Board develops and administers standardized tests and curricula used by K–12 and post-secondary education institutions to promote college-readiness and as part of the college admissions process.

In addition to managing assessments for which it charges fees, the College Board provides resources, tools, and services to students, parents, colleges and universities in the areas of college planning, recruitment and admissions, financial aid, and retention.

Check out their Net Price Calculator

Saving for College was established as a private company in 1999 with a mission to help individuals and professional advisors better understand how to meet the challenge of paying higher education costs.

Mastering College Approval

Deep-dive of educational and marketing materials for those advisors wanting to become College Planning experts.

Joe Messinger, CFP, Capstone Wealth Partners

Expert. Excellent speaker.

2 Assuming 4% inflation, $54,500 PV

5 The student and family want to have the lowest income numbers during the tax year that is the student’s spring of the sophomore year in high school and the fall of the student’s junior year in high school. This is what is called the “base year” and provides the basis for the financial aid package for all four years. Parents might request that a December bonus be postponed until January. If you are small business owner consider accelerating expenses into the base year. Try not to sell off investments and be subject to capital gains during this year. Source:

6 Assets in the student’s name are assessed at a rate of 20%. Assets in the parents’ names are assessed at a rate of 5.64%. Students can pay for things needed for college like ACT/SAT test tutors or a car.


8 According to the National Collegiate Athletics Association (NCAA), only 492,000 high school students become NCAA student-athletes each year out of 7.3M high school students high school student-athletes there were in the same year. Source: