Paying for college is one of the biggest financial challenges families face today. We sat down with Ben Laska, MPPL’s in-house expert on college planning to unpack key strategies parents and prospective students should consider when preparing for this major investment.
From saving strategies to tax credits, here’s what you need to know.
What’s the first thing families should think about when planning to pay for college?
The first step is a mindset shift. Too often, college planning is treated as an afterthought – much like people delay saving for retirement. Ideally, the conversation about funding college should start as soon as the child is born. The earlier you start, the more options you’ll likely have later on.
Are there different life stages families should think about when it comes to planning for college?
Yes, and each stage comes with its own strategies. I often break it down into four phases:
Early Stage: Planning and Preparation
Start saving when kids are young. Thanks to recent rule changes, unused 529 funds can even be rolled over into a Roth IRA, so early savings can benefit your child even if they don’t go to college. Also, 529s can now be used for K–12 private tuition, offering additional tax advantages.
High School Years: Pre-College Planning
This is the time to focus on scholarships, improve ACT/SAT scores, and even shop for colleges. Today’s tools allow families to compare schools side by side, including estimated costs and potential post-graduation salaries.
College Years: Strategic Spending
Maximize needs-based tuition aid. This involves understanding how family income and assets affect financial aid eligibility, applying for FAFSA, and smart use of grandparent-owned 529 plans to time tuition payments strategically.
Post-College: Loan Repayment
After graduation, families should explore strategies like loan consolidation, public service loan forgiveness, and whether to pay loans off quickly or gradually. Depending on income, student loan interest may also be tax deductible.
What role does a financial advisor play in all this?
When it comes to saving and paying for college, financial advisors help families build a roadmap that involves determining how to save, where to save and how to balance responsibilities between parents and students. For example, maybe you want students to pay 50% so they’re invested in their education. Advisors also bring experience from working with many families and can help with special cases, like rolling over a 529 to an ABLE account if a child has special needs.
What type of tax credits are available to help families that are paying for college?
During the college planning years, parents should look into whether they qualify for any tax credits. There are two in particular worth investigating.
The American Opportunity Tax Credit (AOTC), which offers a tax credit for up to four years of undergraduate expenses. This is an income-based credit.
The Lifetime Learning Credit (LLC), which is less generous than AOTC though it applies beyond four years and can even help parents if they’re taking courses. The key for this credit is making sure the student is filed as a dependent to qualify.
It’s important to work with a tax professional to determine whether one qualifies and how to best utilize these tax credits.
After graduation, what’s the best strategy for paying off student loans?
There’s no one-size-fits-all answer. It depends on whether the loans are federal or private, the interest rates, income level, and eligibility for forgiveness programs. Student loan interest can be tax deductible, so rushing to pay off loans may not always be the smartest move. Again, a financial advisor can help weigh the pros and cons.
Do you have any final thoughts families should know about saving and paying for college?
College is expensive, but with the right planning it does not have to overwhelming. Sometimes you can get creative. For example, certain specialized programs allow students to use 529 funds for unique expenses, like equipment or even, in one case, a horse for an equine studies program! The key is making sure the expense qualifies under 529 rules.
Start early, use the right tools, and don’t be afraid to seek professional advice. With smart planning, families can reduce the stress of paying for college and set their children up for success.
Ben, thank you for your insights on this important topic.