Kids in college after retirement (lower income version)

[43210]

This thread is for generally brainstorming and sharing thoughts on the financial aspects having kids in college after retirement.
However I want to focus on the "low(ish) income version", say, where the parents have (or can ensure) an AGI in the mid-5 figures. I'll start with some random thoughts.

I found this
FinAid | Financial Aid Applications | Maximizing Your Aid Eligibility
and one obvious strategy that springs to mind in to try to qualify for the
Simplified Needs Test (so that assets are ignored for FAFSA)
FinAid | FinAid for Educators and FAAs | Simplified Needs Test Chart
so you need AGI less than $50k, and not have any of the many items in the linked chart (e.g. have no Sched D, no foreign tax credit, no reportable HSA activity etc etc).
An even lower AGI will ensure zero EFC.

However I understand that Expected Family Contribution (EFC) is not the amount you have to pay - it could be much more (or less) depending on the college.

I found this (2017-18 - don't know if the next one's out)
https://studentaid.ed.gov/sa/sites/default/files/2017-18-efc-formula.pdf
which pretty much explains the whole FAFSA formula if you trace through the forms and tables. There are marginal rates of up to 47% for income and up to 5.64% (per year every year) on assets. These are very steep slopes that you want to stay below, or else, combined with other things, you could sometimes be effectively at near 100% tax bracket.

However I didn't find any correspondingly transparent account of CSS/Profile formula(s?), and I'm wondering if that's more proprietary and secret. (Is it?) So any specific FAFSA "strategies" may be inapplicable to CSS/Profile, and you can't really know in advance which formula you will be working with, making planning harder.

I did find Net Price Calculators for various colleges. I noticed that the really top colleges could be almost free if you have an AGI like $70k, whereas lower tier private colleges, and out of state public universities are totally unaffordable and not even worth considering (unless you get a merit award instead).

Anyway, it's some years off for us, and I haven't looked deeply yet. Mainly I don't want to get blindsided by some unexpected expense (which could make you need to withdraw more from retirement account, meaning more income, and so higher costs), so it seems to be a long term balancing act.

In our case we'd have 3 kids over 9 years. We do have $50k per kid in 529 (but stopped adding to it some time ago realizing retirement saving should come first) and will have no income sources other than savings (almost all in pre-tax retirement accounts).

I'm interested in hearing from others who are also planning for kids in college after retirement, or are in this scenario now, or have already been through it.

 

[NYEXPAT]

I have kids 2 & 12 so will have to deal with it eventually. Live overseas, but will move to the USA for the college years. I will probably leave most assets buried overseas for my return. Wife will also attend college (nursing degree) so hopefully she will not earn an income till the first one is through undergrad. Depending on the economy, tax laws. Health insurance, may come back and do it again for the second one. Will be interested to see where this thread goes.

 

[SecondCor521]

Thanks for starting this thread. I have a high school junior and a high school sophomore, so I'm in the midst of things now.

A couple of salient points:

* Zero EFC is under $25K in AGI.

* Not all - in fact it seems not many - schools are need blind. I am currently thinking hard about this. If my kid is a great candidate for admission I may actually be hurting his chances: If we qualify for a lot of financial aid, that means that to the school my kid is not as much of a revenue generator. At some point, at most schools, that comes into the equation, and I'm worried it could turn a potential acceptance into a potential rejection. I would appreciate input on this.

* It's not the biggest part of the picture, but people should keep in mind the tax benefits. There are several; the one I'll probably use for myself is the American Opportunity Tax Credit, which is a $2500 tax credit on the first $4K of expenses, and it goes for all four years. The key point here is that those $4K in expenses must be paid out of pocket; you can't use 529 or ESA money and double dip.

* I disagree with the OP a little bit in that I think you can (and I think in some cases it is better if you do) figure out ahead of time whether you'll be dealing with FAFSA schools or CSS Profile schools. It's easy to find out which schools are which, and if you want to, you can limit your kids to one or the other. I remember when my oldest was in his senior year and talking with parents who were trying to figure out how to explain to their kids that although the got accepted to their dream school, the parents couldn't or wouldn't help pay for it enough to make it a realistic option. It seems cruel to limit their choices up front, but I would ask you to consider if it isn't crueler to let them dream and hope and plan to go to a school and find out much later that in fact the rug has been pulled out from under them and they can't go.

* From what little I know about CSS Profile vs. FAFSA, if you can generate a high-asset-low-income situation you might be able to get a lot of aid at FAFSA schools. CSS Profile it is much harder to do this. CSS Profile seems to ask for a lot more data and is a lot more invasive, for people who might care about that.

* To the degree that kids overlap, you can get more aid. Basically your EFC gets divided among all the kids you have in college that year.

* I think most people are aware of this now, but the FAFSA base year is in the process of changing. If I have this correct (and I hope I do, I've double checked myself a half-dozen times), this year, 2017, is the tax year that FAFSA will use for aid for students who will start college in the fall of 2019. So what your income is this year affects those of us with high school juniors (like me), and your income next year affects those of us with high school sophomores (like me).

 

[daylatedollarshort]

Our kids received state grants for college tuition. The state grant income limits where we live are pretty close to the ACA income limits so it was a no brainer for us to try to manage our income for both. The FAFSA not only considers income but assets, however there are many exclusions including personal residence, small businesses and retirement accounts. The Forbes online site has some good articles including one on how to reposition assets to qualify for more financial aid.

I think the thing that worked out the best for college for our kids other than qualifying for financial aid was having them look at the Payscale reports on salaries by college and salaries by major. Some of the highest starting salaries / majors can be found at quite reasonably priced colleges and universities that are good value for the money. The Job Outlook Handbook is another good online resource - especially regarding employment prospects now and in the future by job type. These days the College Scorecard might also be a good resource:

https://collegescorecard.ed.gov/

Our kids also had community college and online course credits, paid internships and tutor jobs to help with college financing.

 

[43210]

Thanks for the helpful comments/suggestions everyone.

I found a link on the FAFSA changing to "prior prior year"(?)
https://studentaid.ed.gov/sa/about/announcements/fafsa-changes
so this has already started. For academic year N to N+1, they look at tax year N-2 (instead of N-1 as they'd previously done).

Can you get them to consider year N-1 instead? (It could be risky hoping for such manual intervention in what they consider.)

Since almost all our assets are in pre-tax retirement accounts, we need to plan how to draw money out, with income and asset considerations in mind. (I also need to consider where to place savings in my final working years.) The dilemma is that building up taxable account reserves increases assets while reducing income (from retirement account withdrawals). I realize Roth withdrawals count as income, so that's certainly not a place for college funding.

I saw that Roth conversions also count as income (even though the funds stay in retirement accounts). I thought that maybe that could be manually reconsidered (though again risky hoping for that). Has anyone had experience with how Roth conversions are treated. I could just accept that Roth conversions won't happen for about a decade of kids in college, and can plan for that, but it would be good to know whether it'll be an option or not.



* "income" and "assets" means for FAFSA (and CSS/Profile) purposes, which can be different to tax and other purposes.

 

[daylatedollarshort]

Since almost all our assets are in pre-tax retirement accounts, we need to plan how to draw money out, with income and asset considerations in mind.

One thing we did was get a home equity line of credit on the house so in years we bumped up against the ACA / FAFSA limits we could use the HELOC money to pay expenses without increasing our MAGI. If you do a search here there are probably more posts on managing income for ACA than FAFSA but some of the tips could be used for both. Like for ACA an HSA account helps lower MAGI, but I don't remember if that helped with FAFSA as well.

I also found it more advantageous to work on lowering our overhead instead of part-time work as a hobby because the part-time work would increase our MAGI, not help lower it. Credit card signup games are golden at our house because the reward points usually are not taxable, and we're always bumping up against the MAGI limit so a few extra thousand a year here and there of headroom always helps the cause.

 

[RE2Boys]

I just completed the FAFSA for my younger son, currently a freshman in college. For the 2018-2019 tax year, they look at the tax returns filed for 2016.

In my case, my after-tax investments exceed the retirement accounts and the 5+% contribution of the after-tax investments to the EFC kills any chance of need-based aid, even when the EFC is split between my freshman and his sophomore older brother.

Only reason I bothered to file is that a FAFSA is required for him to continue to receive his merit-based aid from the school. And both boys opted to attend state schools with reasonable costs. And neither bought into the "dream" school concept.

Sorry, I have few suggestions as any I had studied didn't help our situation.

 

[ncbill]

* I disagree with the OP a little bit in that I think you can (and I think in some cases it is better if you do) figure out ahead of time whether you'll be dealing with FAFSA schools or CSS Profile schools. It's easy to find out which schools are which, and if you want to, you can limit your kids to one or the other. I remember when my oldest was in his senior year and talking with parents who were trying to figure out how to explain to their kids that although they got accepted to their dream school, the parents couldn't or wouldn't help pay for it enough to make it a realistic option. It seems cruel to limit their choices up front, but I would ask you to consider if it isn't crueler to let them dream and hope and plan to go to a school and find out much later that in fact the rug has been pulled out from under them and they can't go.

I didn't limit my kids applying to whatever school they wanted, but let them know well in advance that we'd pay for public, in-state, anything else was their responsibility.

One kid spent a year at a nearby private university, thanks to a ROTC scholarship, which covered tuition/fees, so that year only cost us about half of what we expected. They then re-applied and are now at their first choice of U.S. military academies.

Our current high school senior applied to nearly a dozen schools (many waived application fees, but yes, I paid for the rest) & has been accepted to more than half so far.

They'll make a decision sometime next Spring, based on what they want and of course how much financial assistance they're offered.

Some of the private schools, in their acceptance letters, offered tuition waivers that bring down the annual cost to near that of public, in-state schools, & that was without filing a FAFSA or other scholarship application.

EDIT: we are also finding that for most schools they'll still need to file a FAFSA if applying for merit-based aid.

 

[ncbill]

There is another way for your kid to get independent status under FAFSA before age 26: be a veteran.

There are several Army 2-year MOS available, which would also qualify them for partial GI Bill benefits &, IIRC, the in-state tuition rate at state schools.

My current high school student, who wants to follow their sibling into service, is considering the above, depending on the results of their college applications.

 

[SecondCor521]

Thanks for the helpful comments/suggestions everyone.

I found a link on the FAFSA changing to "prior prior year"(?)
https://studentaid.ed.gov/sa/about/announcements/fafsa-changes
so this has already started. For academic year N to N+1, they look at tax year N-2 (instead of N-1 as they'd previously done).

Can you get them to consider year N-1 instead? (It could be risky hoping for such manual intervention in what they consider.)

Since almost all our assets are in pre-tax retirement accounts, we need to plan how to draw money out, with income and asset considerations in mind. (I also need to consider where to place savings in my final working years.) The dilemma is that building up taxable account reserves increases assets while reducing income (from retirement account withdrawals). I realize Roth withdrawals count as income, so that's certainly not a place for college funding.

I saw that Roth conversions also count as income (even though the funds stay in retirement accounts). I thought that maybe that could be manually reconsidered (though again risky hoping for that). Has anyone had experience with how Roth conversions are treated. I could just accept that Roth conversions won't happen for about a decade of kids in college, and can plan for that, but it would be good to know whether it'll be an option or not.

* "income" and "assets" means for FAFSA (and CSS/Profile) purposes, which can be different to tax and other purposes.

Can you ask? Sure, you can ask anything. But I wouldn't. I think you risk looking like a special snowflake when you aren't. The financial aid office people are, I'm sure, very very tired of hearing why people are special cases and deserve a break. Some undoubtedly do, but it's far fewer than those who think they do.

That being said, it is commonly stated that if you have a significant event - like a primary breadwinner job loss - that happens after the N-2 year tax return, you should let them know, be prepared to document, and they will adjust. But just asking for N-1 because it works better for you probably won't fly.

On Roth conversions, yes, they count as income and yes, you can ask for an adjustment. In my notes I have the following quote. I don't know where I quoted it from - undoubtedly somewhere on the web that seemed trustworthy to me:

"If the family converts a traditional IRA into a Roth IRA, they should appeal to the college financial aid administrator to get the conversion disregarded as income, assuming that the full amount of the distribution was rolled over into the Roth IRA. The U.S. Department of Education issued guidance in Dear Colleague Letter GEN-99-10 to encourage college financial aid administrators to make such an adjustment."

@ncbill, congratulations on your kids' acceptances! And yes, certainly letting the student know what the financial plan is well ahead of time so the student can make informed decisions works well.

 

[rodi]

I just met with a free FAFSA consultant last week to help me understand the EFC/FAFSA/CSS profile stuff. Hefar.org was the group - it's a non profit subsidiary of a financial planning firm... so I'm sure they use this to spot "targets" to pitch money management to. But they didn't hard sell, so it was all good. (Mentioned bogle and he said that he 'got it' that I wasn't interested in their for profit, for fee, services.)

FAFSA excludes retirement accounts and primary residence. CSS includes primary residence... which sucks for people in expensive housing areas like California. CSS also includes business assets... which in our case is our granny flat. I was hoping that it counted as part of the primary residence - it's on the same lot - deed restricted to never be subdivided... But it counts.

We were told about the American Opportunity Credit that SecondCor521 mentioned. It's a reason to not put all the money in the 529 - leave some to pay out of regular savings. This is a tax credit, not a deduction. It gives a tax credit for 100% of the first $2000 spent on qualified expenses and 25% of the next $2000. So you'd want to pay $4k out of non-529 funds/year. It can only be claimed for 4 years/kid. So if your kid is on a 5 (or 6) year plan... no luck for the extra years.

We were also told about the Lifetime Learning tax credit. It's 20% of the first $10k spent. No limit on the number of years.

Another tip the consultant gave us was a way to lower your EFC with a younger child. In our case - have our younger son enroll in a class at the junior college while in High School. Even one class counts as a kid in college - so the EFC for the older kid is reduced. I'm not sure if that makes sense for our personal situation since the kids attend an International Baccalaureate school and are already in pretty intense, college credit, courses....

The other thing the consultant suggested is for if our son is accepted to his dream school CalTech. (This is highly unlikely). Our granny flat is worth about $250k. He suggested taking a mortgage against it - and buying a whole life income annuity. My head almost exploded at the idea of buying whole life at this point in my life. (or any point) But he said the issue was to take a business asset (granny flat) and convert it to an asset that doesn't count against CSS profile (whole life). I'm so uncomfortable with the idea I doubt we'll do this.

My older son is a Junior in HS, and younger son is a Freshman. So this is the year that counts for FAFSA/CSS. We will be skipping Roth Conversions for the foreseeable future to keep our EFC lower.

The upshot of our consultation - we *might* get around $3k from a UC school. And still have to pony up $30k ish... Or if son scores a perfect SAT *and* gets straight A's we'll get about $20k help at Cal Tech - and have to pay around $45k. Or if we do the weird life insurance thing - we could drop that $45k to about 20k. So if he gets a perfect SAT I'll start considering the mortgage/life insurance trick.

 

[SecondCor521]

A general bit of advice is to pay attention to what expenses qualify for what tax credits and tax savings plans. Things like airplane tickets back and forth to school and AP exam fees might fall under "college expenses" to you, but often not to 529 plans and tax credits. Some things apply to tuition only, others include room and board, books, etc. So as rodi notes, you may need/want to keep funds outside for this kind of stuff.

In general, it seems you can't double dip. If you want the tax credits, you can't also use 529 or ESA funds to pay for them. You can't use the AOTC and LLC on the same expenses. There are also other restrictions - I think, for example, you can't claim both the AOTC and LLC for the same kid in the same tax year.

I will mention this ever so briefly because I want to keep this thread on track, but there is a provision in one of the tax bills to extend the AOTC for a fifth year at half the amount (so I'm guessing $1250 on $2K of expenses) - as noted above it's a credit so it's pretty valuable.

@rodi, sincere good luck on the CalTech application!! Very hard school to get into even for the best and brightest kids, I think.

 

[daylatedollarshort]

One other way to cut costs for a name school in California is to go to community college first. U.C. Berkeley in our area is much easier to get in as a transfer student from community college than right out of college. I don't know if this is true for other state public school systems but might be worth looking into.

Plus the two years at a CC are pretty cheap. Both the state and university systems in California have agreement plans with the community colleges. One of our kids graduated from a CC with a transfer type AA and then was guaranteed by state law to finish the 4 year in two more years. Before the transfer AA was mandated by state law, students were having issues with their community college course credits not always transferring.

 

[retiredunder50]

You also need to be mindful of the impact to the EFC by your child's assets and income. I think the first $6420 of the child's income is protected, but after that, for every dollar he/she makes, 50 cents goes towards efc. My second child had a full ride (tuition fees room board) and received additional money to cover up to the cost of attendance (about $6K/yr). He also worked during the summer. That was the good news. The downside is that scholarships and grants beyond tuition, fees and books... counted as income on the tax returns. Income taxes were due AND the income numbers are used to calculate EFC for the next FAFSA round. Luckily, he had more merit scholarships than necessary, but just be aware that scholarships and grants have a tax impact as well as a possible EFC impact. Similarly, child assets are treated more harshly than parent assets. 20% of child assets are added towards EFC. Maybe spend down some of that money before applying? Keeping parent income below $50K on FAFSA certainly shields your assets from counting against you.

As mentioned in a post above, the American Opportunity credit is great for the first 4 years (and now possibly 5 via the tax plan proposal). Unfortunately, a few other related higher education benefits look to be changing (possibly say goodbye to student loan interest deductions, the lifetime learning credit, graduate student waived tuition...) We need to keep on top of the final product and plan around any changes.

Definitely try to get more aid by bouncing financial aid offers received from other schools. I did this for my oldest and it was worth the faxing, phone calls, and letters.

Be careful with line items on the financial aid offer letter that are not guaranteed beyond year 1. Teaser first year amounts fool many folks.

Be wary of the free info talks at the high schools offered by financial aid experts. Many of them are just trying to sell you annuities to shelter some of your assets.

My middle son took enough AP exams to wipe out a year of undergrad. It was worth the cost of books and tests.

I have one more to go!!!

 

[Texas Proud]

Be aware that the credit is worth only $1000 if you do not have any tax liability.... IOW, that is the refundable amount... the rest offsets taxes due...


I do not want to create enough taxable income to actually have a tax liability in order to get the rest of the credit as I would lose much more ACA credit...


I will look at draining the 529 faster... I was planning on spacing it over 4 years, but now maybe 2 or 3...

 

[retiredunder50]

Depending on income level, you can use E & I series savings bonds to help pay for some education expenses and the interest will be tax free. IRAs can also be tapped early for some educational expenses as well, penalty free, but this would trigger the use of a 1040 return which has implications on FAFSA filing - it would eliminate the simple needs and the zero efc eligibility. If using IRAs early, maybe do it in last year?

 

[sengsational]

Both of my kids are out of college now, but I went through the FAFSA/CSS thing. Super invasive information gathering, but it was worth quite a bit of college savings.

There were a range of conditions for me. It started with me getting W2 income with one then two kids in college (only one year of overlap...so sad!). But then I FIREd and had just one in college.

The only way I could get the EFC down low enough to matter was to designate funds as retirement funds (I used a variable annuity from Vanguard). That way, the "contribution from assets" was much lower. But at the price of not getting low tax rates on dividends and capital gains, since all the gains come out as regular income. And also, all the gains must be removed from the account first before the basis can come out (tax free). This all presumes that I never annuitize.

The schools did both calculations (FAFSA and CSS), and they used whichever one benefited them best. I did try to argue a little bit, but it was not fruitful. As mentioned, the EFC is the starting point for the financial aid officer, but unless there's justification, that's what's used. But of course they could just give you a bunch of loans, and you're no better off than you would have been not bothering with all of this. Some schools are not inclined to let their students graduate with tons of loans, though. That's a statistic that's measured, so the best schools try to keep that number down. What you want are institutional grants (just another name for "discounts").

Real obvious to me, but maybe not to everyone, is that you want your kid to be flat broke. No UGMT account, nothing. If you put something in your kid's name to escape a few bucks in taxable income for the years leading up to college, you'll get completely hammered on the EFC calculation.

The FAO will try to make the first award letter (freshman year) look good, but might not try so hard as the years progress. Just keep that in mind.

The CSS calculations were public back in 2009 or so. I have a spreadsheet with those that I made from a book called "Paying for College Without Going Broke". The procedure probably hasn't changed much, but the numbers are all outdated. That book had a side-by-side "Federal Methodology" and "Institutional Methodology" calculation area, where you could write in your numbers and calculate both using the exact formulas.

The FAFSA uses the tax return that's already done and booked. At least that's the way it was from 2010 to 2016. For instance, I filled-out the FAFSA in January of 2010, I used what I thought would be on my 2009 1040. The CSS/CollegeBoard process included having me submit my entire tax return once I'd finished it. Of course freshman year didn't start until the fall of 2010. The point is, you need to start early. I don't know anything about the change from N-1 to N-2.

I asked my FAO about a Roth conversion, and she told me that she would adjust for it. She lied. I challenged her, but she wouldn't back-down. I got slammed pretty hard that year, so I didn't do Roth conversions after that, until I was "out of the woods" FAFSA-wise.

As an aside, there's a post about how to use 529 funds. I did it wrong the first few years. Just for simplicity, I'd recommend taking out the whole year's worth equal to the published school's budget. You have one 529 transaction, and it's much easier than having lots of them. You can have the check made out to yourself and it doesn't impact your taxes because it's all going to be spent on qualified education expenses. Here's a question and answer on that topic.

I just met with a free FAFSA consultant last week to help me understand the EFC/FAFSA/CSS profile stuff. Hefar.org was the group - it's a non profit subsidiary of a financial planning firm.
...
The other thing the consultant suggested is for if our son is accepted to his dream school CalTech. (This is highly unlikely). Our granny flat is worth about $250k. He suggested taking a mortgage against it - and buying a whole life income annuity. My head almost exploded at the idea of buying whole life at this point in my life. (or any point) But he said the issue was to take a business asset (granny flat) and convert it to an asset that doesn't count against CSS profile (whole life). I'm so uncomfortable with the idea I doubt we'll do this.

That's why those guys do the free consulting...to sell you stuff. Stuff that usually pays them huge commissions. You could still mortgage the flat and buy any "insurance product" that would turn those funds into "retirement assets" that don't show on the FAFSA. Like I said above, I bought Vanguard VA, which is basically just a Vanguard mutual fund wrapped in the VA construct. No need to ever annuitize, and I don't plan to. But the CSS still asks about retirement assets, including insurance products. It's not something that's supposed to be in their EFC formulas, but who knows (the calculation methodology is now secret).

 

[SecondCor521]

The FAFSA uses the tax return that's already done and booked. At least that's the way it was from 2010 to 2016. For instance, I filled-out the FAFSA in January of 2010, I used what I thought would be on my 2009 1040. The CSS/CollegeBoard process included having me submit my entire tax return once I'd finished it. Of course freshman year didn't start until the fall of 2010. The point is, you need to start early. I don't know anything about the change from N-1 to N-2.

It used to be that the FAFSA could be submitted by January 1st of the student's senior year based on the tax year covering the student's junior spring and senior fall semester.

Now - well, for students starting college in the fall of 2019 and later - the FAFSA can be submitted by October 1st of the student's senior year based on the tax year covering the student's sophomore spring and junior fall semester.

So you can submit the FAFSA two months earlier than before but it's based on the tax return from a whole year earlier than before.

 

[rodi]

From what I understand - the FAFSA form now auto-imports from the IRS now, as well. And if there are errors in the import it's a total PITA to get corrected. I'm not sure if there's a way to bypass this import of tax data.

 

[Katsmeow]

Our son graduated from college last December. He took 6 years to graduate college. But, the first 2 years were when he was under 18 (he started at 16) and when our income was the highest. We did take the tax credit for the last 4 years.

But for FAFSA - I realized early on that for us this largely became a non-issue by simply choosing a state school for him to attend and having him start at CC.

He went to CC for 3 years (it was a little over 2 years of credit -- he had classes that didn't transfer because he radically changed his major -- think starting out with English and ending up with computer science). Those years were very, very inexpensive. He lived at home and tuition was cheap. The courses he was taking were all transferable to meet his core requirements at the university.

He then transferred to a state university. He lived at home for one year commuting (about an hour away). Then the last couple of years he lived near school.

Doing it this way, meant that our EFC always exceeded the amount of his tuition and living expenses.

He ultimately graduated with a small student loan (around $10k) most of which we agreed to pay off. He is paying for part of it (a class he didn't like and just wanted to drop and where he chose to live at a place more expensive than we wanted to pay for his last year).

I feel that he got a totally fine education without bankrupting us. He could, of course, have gone to a more expensive school but we were willing to foot the bill for a state school. He could spend more if he wanted to (he didn't).

He is currently in grad school (now an independent student and paying for his own schooling).

 

[RE2Boys]

Depending on income level, you can use E & I series savings bonds to help pay for some education expenses and the interest will be tax free. IRAs can also be tapped early for some educational expenses as well, penalty free, but this would trigger the use of a 1040 return which has implications on FAFSA filing - it would eliminate the simple needs and the zero efc eligibility. If using IRAs early, maybe do it in last year?

If one is counting on using the EE & I savings bonds for education, pay very close attention to what Congress does with the income tax overhaul. In the House version (not sure but suspect it was in the Senate version also), use of savings bonds for education was to be rescinded at the end of 2017.

If in final version of the tax legislation, one has about a month to cash the bonds and deposit the full amount cashed into a 529 plan.

 

[43210]

Thanks for all this fantastic information everyone.

 

[kevdude]

Thanks for all this fantastic information everyone.

+1 All great information and links too.

Our son is a sophomore in HS currently so we'll be filling the forms out in no time at all. We also have a daughter in 7th grade. We've told our kids we will pay for the highest in-state public school (currently University of Washington) and have the Washington version of a 529 for them which is basically prepaid tuition and fees. If they go out of state, the funds can be used at whichever school they choose, based on the tuition of the most expensive in-state public school, and we will cover up to the amount of the in-state school cost (hopefully that makes sense) and they are responsible for the rest.

Looking over some of the "estimated" aid calculators at a couple of the schools our son is interested in, we will not be eligible for any need-based aid based on our assets. Our son currently has a 4.0 taking all honors and AP classes, and hopes to be valedictorian, as well as does debate, music and volunteers so hopefully he will get merit scholarships to whichever school he chooses. Unfortunately for him, he wants to go to Berkeley so that is a good sized nut for him to cover - ~$40k difference in school costs.

Our income next year should be low so once we actually fill the forms out we will get some need-based aid, but am certainly not expecting any.

Thanks again for all the great information.

 

[Ragna]

Regarding 529 and double dipping for tax breaks.

It's my understanding that this only would apply to the earnings portion, right? (You've already paid federal taxes on the original investment money)

Also, you get a break on state taxes when you invest in the 529 and it is not taxed when you take it out. Something to consider.

 

[SecondCor521]

Regarding 529 and double dipping for tax breaks.

It's my understanding that this only would apply to the earnings portion, right? (You've already paid federal taxes on the original investment money)

Also, you get a break on state taxes when you invest in the 529 and it is not taxed when you take it out. Something to consider.

I think your understanding is incorrect. I found the following in the instructions for form 8863:

"Tip: [...] An education credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA or qualified tuition program, as long as the same expenses are not used for both benefits. For details, see Pub. 970, chapter 7 or 8."

In looking at Pub 970, there is language in there that pretty clearly prevents double-dipping for any combination of the AOTC, LLC, and 529's/ESA's.

ETA: What you may be thinking of is that if you take out more than is needed for college expenses, I think that there is a rule that you only pay earnings and 10% penalty on the portion of the excess that is attributable to earnings.