Planning for College in 2024: A Tale of Two Students
Consider Harper and Sarah, two high school seniors who are completing their final year of secondary education. Both will graduate with good grades in the spring of 2024, both have firm plans for going to college, and both sets of parents have spent considerable time filling out and submitting the FAFSA (Free Application for Federal Student Aid), arranging campus visits with their kids, topping up 529 plans, and doing all the other things that parents do to help their children prepare for the transition into higher education and campus life.
Harper intends to enroll at a public university in his home state that offers a solid program for his desired degree. He looked at a couple of out-of-state schools, but ultimately he and his parents decided that the higher out-of-state tuition costs weren’t justified by the relatively small difference they perceived in the quality of the curriculum. Harper has just over $20,000 saved up in a Uniform Transfer to Minors (UTMA) account, and his parents set up a 529 plan for him when he was ten; between their contributions and gifts from his grandparents over the years, Harper has a total of $65,000 available to cover his college costs. Because the estimated price tag for a four-year degree at his chosen school is about $90,000, Harper and his folks have a deficit of $25,000 that they will need to cover with some combination of financial aid, grants, scholarships, and other sources.
Sarah also has made her selection of an in-state university, but instead of enrolling there as a freshman, she and her parents have decided that she will live at home and attend a local community college that offers a transfer program for her chosen university. Sarah’s GPA and SAT scores are high enough that she also qualifies for a the Transfer Scholar Network scholarship program offered by the community college. Sarah’s cost for her first two years of education is expected to be about $3,000, and with the transfer scholarship included, her second two years at the university are estimated to total $18,000 in cost.
Many Roads, One Destination
As you can see, these two students, while ultimately aiming for the same result, are taking very different paths toward their destination. While no two students are likely to follow the exact same strategy in paying for college, it’s important for them—and their parents—to realize the many possibilities that exist for securing a college degree.
Fortunately, a number of resources exist for parents and students who are seeking the ideal combination of value and cost-efficiency in higher education. Sites like BestColleges.com, CollegeRover.com, and others permit side-by-side comparisons of colleges and universities within a state, sorted by degree programs, and other analytic vectors. Resources like the Consumer Financial Protection Bureau’s “Paying for College” or StudentAid.gov can help with sorting through the various options around financial aid. Students who have their sights set on a career in a particular industry may have access to career-specific scholarships that can be located at sites like Scholarships.com.
Tax Implications
For those with various types of tax-advantaged accounts, there are additional considerations. For example, distributions from either a Roth or traditional IRA account that are used for paying qualified educational expenses are not subject to the 10% early withdrawal penalty, though they will be taxed as ordinary income. On the other hand, such distributions may affect needs-based financial aid eligibility. For 401(k) plans that permit loans, the funds may be used for qualified education expenses, with the advantage that such loan proceeds are not typically counted as income on the FAFSA; however, if the proceeds are not used within a certain time frame, they may count as assets for needs-based financial aid calculations.
Grandparents or others who may wish to gift assets to a student are able to give up to $18,000 to any individual in 2024 ($36,000 for a married couple). Further, if the funds are provided directly to the educational institution to pay tuition, rather than to the student, the amount is not counted against the lifetime gift tax exclusion. Additionally, a special provision in the Internal Revenue Code permits the gifting of up to five times the annual exclusion to a 529 plan in a single year; the gift is deemed to have been given over a five-year period. This means that in 2024, a single donor could transfer up to $90,000 into a college student’s 529 plan without exceeding the annual gift exclusion or reducing their lifetime gift and estate tax exclusion.
At Quantum, we want you to be aware of all your options. We work closely with our clients in order to become as familiar as possible with their total financial situation: available resources, chief goals, most important priorities, and challenges. Then we help them design a strategy that best matches their individualized needs. As a fiduciary, Quantum is committed to putting each client’s needs and best interests at the forefront of every conversation.
To learn more, please visit our website to read our article, “Beyond the Red Envelope: Multi-Generational Wealth Transfer Strategies.”
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