This week Josh & Austin are talking about how to pay for college! What options are out there for paying for college? What kind of scholarships are available? How the heck does FAFSA work? Don’t fret! Josh & Austin have the answers in this week’s episode of The Invested Dads Podcast!
Main Talking Points
[3:29] – Different Ways to Pay for College
[3:52] – #1: Pay as You Go, Ca$h Money
[5:14] – #2: Scholarships & Grants
[7:42] – Dad Joke of the Week!
[10:10] – #3: Investment Accounts (IRAs, Roth IRAs, 401Ks)
[12:35] – #4: Government Bonds
[14:40] – #5: Coverdell Accounts
[15:01] – #6: The Big One, 529 Plans
[18:37] – #7: Good Ol’ FAFSA
[26:37] – Some Extra Facts & Tips
[32:47] – Get Your Free Guide: Eight Timeless Principles for Investing
[33:03] – Our T-Shirt Giveaway is Almost Over!
Links & Resources
Why College Tuition Keeps Rising
T-Shirt Giveaway
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Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast. Simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments. Here are your hosts, Josh Robb and Austin Wilson.
Josh Robb:
Oh, I’m like, “You have one job. One job to do.”
Austin Wilson:
It’s okay, I think I have a five year old’s attention span sometimes, so that’s maybe why. Maybe the game is going to quickly and I’m playing and I’m already frustrated with it, so I’m like, “Hmm, I’m done.”
Josh Robb:
I’m done, I’m out.
Austin Wilson:
All right, hey, hey, hey. Welcome back to The Invested Dads Podcast. Thanks for listening. We are so excited to be providing you this podcast each and every week. We appreciate all the support the last couple months since launch and really wanted you to know that we couldn’t do it without you. Today’s podcast was actually requested by a listener, so shout out to Kevin from Findlay, Ohio. Please remember that if you have any topics you’d like us to discuss, drop us a line at hello at theinvesteddads.com. Today we are going to be discussing a very familiar topic that is actually paying for and saving for college education. Having been through college not so long ago, some longer than others.
Josh Robb:
That’s me.
Austin Wilson:
And having children ourselves and planning for that, we can totally understand the urgency and the feelings that many people have towards this topic.
Josh Robb:
Yeah, so before we get into this I do want to say for Austin and I, when we’re talking about any one piece of a financial plan just keep in mind that there’s the whole picture and savings for college is just one of those pieces. As we’re talking through these things make sure that you see where your financial picture is at to know where this fits into it. Talk to your financial advisor, look at where your long-term goals meet to where this would fit into it. Because remember, there are many ways to pay for college like we’ll talk about really but only one way to pay for retirement, which is through your savings. Make sure that’s on pace before you go anywhere else.
Austin Wilson:
Yeah that’s right, it’s not worth not contributing to your 401K and getting that company match so that you can pay for your kids’ college. Both aspects of saving are very important for a financial plan. Education is a very important thing to be thinking about, so college is a big deal for earnings over the course of a lifetime, and according to the Bureau of Labor Statistics, in 2018 people 25 or older who held a bachelor’s degree, had a median or middle average weekly income 64% higher than those with only a high school diploma. Now they also had about half the unemployment rate, so some pretty big differences there. We’ll link the article from the Bureau of Labor Statistics in the show notes, but I did want to point out that that’s really not to say that someone cannot be successful and wise with their money without a college education. It’s not necessarily a prerequisite. I for one know many people without college degrees that have done extremely well, but as an average it definitely does not hurt to have that additional education.
Josh Robb:
Yeah, and we’ll touch on some of those things at the very end of the episode. The idea is if you are thinking of going to college, we’re going to talk through the ways that saving for and paying for are out there. Again, there’s other partnerships and all the different ways to get into a career that are great and there’s some new things that have happened within this end of last year, in 2019 that allowed even more ability for people to go that route. Where talking straight college, that’s where we’re focus on today.
[3:29] – Different Ways to Pay for College
There are ways to pay for college. There’s first up, paying as you go. Paying through your cash flow, so that’s one option. Using scholarships and grants, when I say that a lot of people think of sports scholarships but there’s a lot of scholarships out there and grants. Using your investment accounts, government bonds, savings, Coverdell accounts, and then the 529 plan. We’re going to walk through all of those together. Austin, pay as you go, what’s that?
[3:52] – #1: Pay As You Go, Cash Money
Austin Wilson:
Yeah this one’s pretty easy, it’s pretty straightforward. Pay as you go is pretty much you use your cash flow from your income to pay for those college costs each semester or each year. This may be either the parents helping out and paying for things as it comes up, as bills come up, or the student doing that, or contributing together to do that. This method it’s really efficient if you can do it. Not a lot of people have the ability to pay these thousands and thousands of dollars for college up front as things happen, but if you can do it it’s great, you’re not paying any interest on things, you’re not taking on any debt.
The only negative impact for this is that it may limit your ability to contribute to some other investments or retirement savings or paying down other things that you might have coming up at that time if you’re choosing to go that route. It’s a balance and yeah, if you have the ability to do that it’s a good option but look at your full financial picture like we talked about a little bit ago and see if that’s the best use of your cash.
Josh Robb:
Yeah because if for four years you don’t contribute to any retirement that will have a long-term impact on what your ending result will be. Work through your financial plan and see what makes the most sense, but some people do have that ability to. Whether they’re working their way through college and using their cash flow as a student to say I want to work each semester and get enough money to pay for my tuition and costs. There is that ability.
[5:14] – Scholarships or Grants
Austin Wilson:
So Josh, talk about scholarships or grants. I pretty much had a full ride scholarship for a donut eating. I think that that was a good use but it didn’t actually pan out, my cholesterol got too high and I got kicked off the team.
Josh Robb:
Yeah, so scholarships and grants those are available for really anybody who is diligent in applying. I say that to mean there is a lot out there, there’s a lot of government grants and scholarships and then there’s a lot of private or institutional grants or scholarships. For someone who is diligent in searching for and applying, there is money out there. According to thecollegeboard.org, which we’ll link in the show notes, they had some statistics about that in the 2018, 2019 school year. The government gave away $41 billion in grants, and then additionally states gave away another $12 billion, and then institution and private organizations gave away $82 billion in grants as well. There is scholarships and money out there for those students that are juniors and seniors, they need to make that a job and say, “I am sitting there and filling these out.”
Austin Wilson:
That’s something that personally I have seen the benefit of. When I was preparing for college a while back, my mom was very helpful in the searching for and helping me to look at what I would qualify for on these scholarship things. The diligence of being able to search and gather and apply for a million things, if you qualify for it and take what you can get, but the diligence for applying for a ton of those things and looking for them and researching them was huge.
Josh Robb:
Yeah and it pays off. You may say, “Well this is only a $500 scholarship.”
Austin Wilson:
It adds up.
Josh Robb:
And I have $24,000 tuition for this year. Well if you get multiple scholarships it eats them down and it’s less you have to worry about finding other ways to pay for it.
Austin Wilson:
Absolutely.
Josh Robb:
There are scholarships out there for anything. For instance, there’s even a coffee scholarship.
Austin Wilson:
That sounds like something I would want.
Josh Robb:
Yeah, for someone who likes coffee there is a scholarship there where you have to write an essay about the importance of education, and they note in there that they give bonus points if you include your passion for coffee within your essay. Again, I know who gets those grants. I bet they all go to computer majors. You know why?
Austin Wilson:
Why is that?
Josh Robb:
Because they’re always working on Java.
Austin Wilson:
JavaScript.
[7:42] – Dad Joke of the Week!
Josh Robb:
Yeah, speaking of jokes.
Austin Wilson:
Speaking of jokes we are interrupting our weekly scheduled podcast to bring you the dad joke of the week. All right Josh.
Josh Robb:
You got one.
Austin Wilson:
I got a real good one, this is a hum dinger.
Josh Robb:
All right, it’s a good one.
Austin Wilson:
All right Josh. Why do you never see anyone with a nose that’s 12 inches long.
Josh Robb:
I know this one. I know this one because then it would be a foot.
Austin Wilson:
That is true, it would be a foot.
Josh Robb:
I’m a dad and the jokes are floating in my head. I love that joke though.
Austin Wilson:
Yeah we’ll re-joke that one, it’s like re-gifting.
Josh Robb:
Re-joking, re-gifting.
Austin Wilson:
Yeah, so can you imagine a nose 12 inches long? You think about it, your ears and your nose really never stop growing throughout your entire life, so if your nose was 12 inches long you’d be like 400 years old.
Josh Robb:
Think of your ears too, be like Dumbo.
Austin Wilson:
Okay.
Josh Robb:
Weird.
Austin Wilson:
Sidebar, and we’re back. Yeah, most people won’t be able to pay the full cost of college through their cash flow. Most kids will not unfortunately be able to get a full-ride scholarship for division I college football or really probably anything full-ride. That’s really hard to come by.
Josh Robb:
Yeah, they’re getting fewer with it.
Austin Wilson:
Very, very rare and a lot of that is because colleges then have to eat the cost of the tuition that that person would bring in and college costs are rising. More on that later. We’ll talk about that here in a little bit. The average undergraduate student received $15,210 in total student aid and took out $29,000 in loans. I mean that’s a lot of money and that’s what we all hear about when we talk about student loans and the “student loan crisis” we’re in for younger people in America today that we’re just saddled with debt that people didn’t have 20, 30, 40 years ago and it’s impacting the way we invest, it’s impacting the way we buy houses, and have families, and all of these things, and even getting married and those things. Josh, how else can you pay for college costs?
Josh Robb:
Yeah, thinking back on that though, so $15,210 in aid and $29,000 in loans. That’s $44,000 is the average cost, so that’s looking at private intuitions all the way through. But think of it that way though. I mean that’s $15,000 less of debt the student had to take out as well.
Austin Wilson:
Absolutely.
Josh Robb:
The plus side is they do help, but it would be nice to see a little more help or a little less of the cost side. It is helping a little bit that those are out there. For the diligent students who do apply it does take a chunk out of it.
Austin Wilson:
For sure.
[10:10] – Your Investment Accounts (IRAs, Roth IRAs, 401Ks)
Josh Robb:
What else is out there? You have investment accounts, so you got your IRAs, you got your taxable accounts, you got Roth IRAs, you got your 401Ks. Those can be used for education, but if you’re under the age of 59 1/2, there can be some stipulations. If you’re withdrawing money from an IRA you can avoid the 10% penalty if you use it for qualified expenses, but you do have to pay tax on that. For a traditional IRA you would show it up as income. It’s doable, you have more income in that year without a penalty, but increase in your income also affects your FAFSA form, which is what you fill out for your financial aid. If you have a Roth IRA, Roth IRAs are after tax money. You could pull out any of your contributions with no tax or penalty and that’s true for… It doesn’t even have to be college expenses. Contributions into a Roth IRA can be withdrawn without a tax or penalty.
Austin Wilson:
So that does not count for a regular IRA, you can pull out anything contribution or earnings, but with a Roth it’s just the contributions without the penalty.
Josh Robb:
Without the penalty, yep to avoid that penalty. Yep and then the one thing to know too is when we talk financial aid, 401Ks are different. We say the better option there is if they allow for a loan, a loan is better because it doesn’t really show up as income for you so it doesn’t drastically affect your financial aid calculation, but you do have to repay that and if you leave employment during that timeframe you have the loan it’s immediately due and it can be a problem because if you can’t pay it back right away it all counts as income and your tax on that with a chance of a penalty as well. There’s some asterisks to borrowing from a 401K.
Austin Wilson:
I think the caveats for any of those options are that when you are using those for education expenses or really pulling it out in any way, shape, or form for any purpose, you’re limiting its growth. If you have a $500,000 IRA and you’re taking $100,000 out of it to pay for college for your kid or whatever. These are totally hypothetical numbers, but that $100,000 is not going to work for you and your entire earnings potential on that account is 20% less.
Josh Robb:
Yep, and you’re limited to how you can put it back in. A Roth IRA has a contribution limit every year, so does a traditional IRA.
Austin Wilson:
You could pull it out faster than you put it back.
Josh Robb:
Yeah, you can’t refill it. Even if you get the money back through whatever you can’t go ahead and dump it back in. Yeah, once you’re there it’s hard to get it back in to get that tax deferred growth again.
[12:35] – Government Bonds
Austin Wilson:
Speaking of investment accounts, there are certain types of investments that are specifically made for college saving and there are some government bonds that are designed to be used for college and the education, specifically the education bond program makes the interest on certain savings bonds tax free when the bonds are redeemed to pay qualified higher education expenses or to roll over into a 529 plan. Some of those eligible bonds include Series EE bonds issued after December 31st, 1989 and all Series I bonds. We linked a good article from finaid.org about college bonds in the show notes. While these are tax free interest, current interest rates are very low and college costs are far outpacing those interest rates as they go up.
Austin Wilson:
According to CNBC, tuition has risen about 3% per year historically, or around the same as inflation, so no big swings there. But college funding really took a hit during the great recession, which caused college tuition to rapidly increase. The colleges were forced then to pass those increase of costs due to the money that they were receiving being less from the government, passed those on to students. At private four-year schools, tuition rose 26% over the last 10 years and it jumped 35% at public schools. Those are some pretty big numbers and this is anticipated to remain well above inflation for the foreseeable future, and that’s something that parents now, as they’re planning for the children, are having to take into consideration going forward.
Josh Robb:
Yeah that’s one of the hardest parts is even when we talk about the different investment vehicles, getting growth to pace that inflation is getting harder and harder. Do you know a lot of things that are growing 35%, 36% a year? I mean the stock market was up what 30 in 2019, but in general you don’t see that growth to keep up with that increase in cost. Yeah, it’s getting harder and that’s part of the big outcry we’ve seen in the news and in politics about wanting to do something about college costs.
Austin Wilson:
Yeah, it’s another topic for another day but it’s college costs and it’s healthcare that are increasing far quicker then the rest of the basket of goods that a typical consumer is going to need to purchase.
[14:40] – Coverdell Accounts
Another example is the Coverdell account, and this allows up to $2,000 per year, assuming you meet the income limits to be added to that account, and the advantage of that account is they have a wider option of investment choices. This account can be used for elementary school, for secondary school, for post-secondary, but the biggest drawback is the limit to contributions. Josh are there are there any other investment options or accounts out there or are we going to jump into the big one, 529s.
[15:01] – The Big One, 529 Plans
Josh Robb:
I mean that’s really the big one when we talk about nowadays. Because the $2,000 max that’s per person for the Coverdell. That’s not a lot of money. If you think of 18 years that’s 36 and that’s not a lot to cover college costs, even with some growth in there. 529s have become a lot more popular and there’s two type of 529 plans. There’s the pre-paid program and the 529 savings program. 11 states still offer the pre-paid program and 11 states offered it but have closed it to new participants. That’s not quite as popular as the savings program.
Austin Wilson:
That’s like where you can pre-purchase college education at lower rates, at today’s rates before inflation.
Josh Robb:
Yeah, so what you do is… The states that offer that that are still open, you’ll at a sense be buying credits to say, “Okay, I’m going to buy this many semesters worth of credits,” and you’ll pay the current rate and then it’ll be good for a certain timeframe. Then no matter what inflation does and what the costs are 18 years from now your kid will then say, “Okay, I got this many credits. I’m already paid for my tuition.” The caveats to that are one, you have to go to schools within the state and they’re mostly public schools, some private schools are in the program but mostly public schools. If your kid decides to go out of state because again, let’s say you’re buying this for a two year old, they don’t know what they want to do or where they’re going, they may be passionate about something when they get older and there’s a better school somewhere in another state, you can get some credit for it but it’s not the full credit. You’re going to be losing some of that value if they go out of state.
Austin Wilson:
The people who bought these pre-pay options in 2004 and 2005 and whatever when costs were low before the recession, probably did okay if they were waiting to send their kid after the recession when inflation really picked up on college costs.
Josh Robb:
Yep, or the other thing too is if there’s a good school that you know our family goes there, that we all like, we’re all big fans of it, the chances are they’re going to go there, you may get a better deal that way because you’re locking it or guaranteeing that return. You know you’re going to have the full cost covered for however many semesters I buy. The other downside to it is normally they don’t cover room and board so you’re still paying those costs. You got your tuition covered but the room and board is an extra expense.
Austin Wilson:
Cardboard box and ramen’s pretty cheap.
Josh Robb:
That’s all you need.
Austin Wilson:
Pretty cheap.
Josh Robb:
The other option is the 529 savings plan. On the 529 plan is a savings plan is where it’s an investment account and you’re adding money to it and it can grow or reduce depending on your investment choices but then you can use that to pay for your costs. It’s not limited to any one school. Now all states offer a 529 plan. Wyoming is the outlier in that they don’t have their own state plan but they use Colorado’s plan.
Austin Wilson:
It’s called Wyrado.
Josh Robb:
Yeah.
Austin Wilson:
I just made that up, don’t Google that.
Josh Robb:
The other nice thing too though is you don’t have to use your state’s plan. Almost anybody can choose whatever state they want, and you may lose out on some tax incentives that your state offers, but if there’s a better plan out there that you like the investment choices you can do that. Some states do offer tax credits, like I said, for investing and you can pay for whatever school you go for. With these new tax changes there’s a lot more availability. You can also now pay for secondary school, primary school up to a certain amount. There’s more uses for 529 plan then there ever has been in the past.
[18:37] – Good Ol’ FAFSA
Austin Wilson:
Josh, you mentioned financial aid.
Josh Robb:
Yes.
Austin Wilson:
What exactly is that? I mean I know CPR, does that count?
Josh Robb:
No that’s first aid, so financial aid is similar. Aid in the sense that it provides help.
Josh Robb:
But not first aid where you’re saving somebody’s life, you’re helping them through the college process. Financial aid, think about it from really three main sources. There’s the expected family contribution, which is the EFC if it’s abbreviated. Then there’s the resources that are available outside from the student, which would be scholarships, direct payments, grandparents, those things like that, and then there’s the cost of attendance. Those three calculations, the cost of attendance is really the federal guideline on what the cost is for your school and it varies school to school. When you have the EFC and that’s really the expected family contribution is calculated through the free application for federal student aid, or…
Austin Wilson:
FAFSA.
Josh Robb:
FAFSA, so the FAFSA forms-
Austin Wilson:
Anagrams are great.
Josh Robb:
It is, oh it’s amazing. The FAFSA form is something that is filled out prior to going to college where they run a calculation and it looks at the… You ready? Because the government loves making things simple so they said, “Let’s look at the prior prior year, so two years prior when calculating income, but when you show your assets let’s look at current asset price.”
Austin Wilson:
Makes sense, that’s a 70 1/2 RMD number.
Josh Robb:
Yeah, so that can be confusing for people, but there’s some advantages to that and we’ll talk through that when you’re looking at planning and using money from certain accounts. The expected family contribution tells how much that family is expected to pay before other things are applied to it. Here’s an example, so your child is planning on attending school and that school is $30,000 a year. We got $30,000 cost, so then you go out and you fill out your FAFSA form, you run through everything, you get your EFC and it’s broken down for the student and for the parents and I’ll explain why in a minute between those two. The student has to pay $3,000 that’s expected, and the parent is expected $15,000. That’s based on income and assets and all that stuff, but that’s saying of that $30,000, $18,000 we expect you to pay for. However you come up with it it’s your responsibility.
Then let’s say they get a scholarship, so the student was out filling out those forms getting them all done. They get $2,000, so then using this formula to get your financial aid they say, “Okay, $18,000 from the family, another $2,000 from scholarships,” and so then they’ll run through that and say, “Okay, what’s left?” $18,000 plus $2,000 is $20,000, and so of the $30,000, $20,000 is already accounted for through what you’re expected to pay and any scholarships you received. What’s left is that $10,000 difference, so what are we going to do with that? That’s then what’s considered what’s available for financial aid. Then the university or college will say, “Okay, we know you need another $10,000 to come here in order to make it, what can we do to help you?”
They’re going to put a financial aid package together and say, “Okay based on what’s available maybe the school has some loans, maybe they have a work study program or some grants, or they may be loans.” They may say there’s some government loans or some private loans you have to apply for to get for this. They’ll put an aid package together so that when it’s all said and done you equal that $30,000. The financial aid is getting you the gap from what is expected from you, scholarships, and then where you need to go.
Austin Wilson:
It’s so interesting. I wonder what the black box looks like on the EFC because there’s a lot of high-level numbers. The government doesn’t know how people spend their money or maybe this is how they think people should spend their money. Based on your income you should have this much expendable income to send your kids to college.
Josh Robb:
That’s really what it is, it’s an assumption.
Austin Wilson:
Everyone’s budget is different so it’s very, very strange.
Josh Robb:
Yep and let’s say so one kids going to school you fill this out. What if you have three kids in school at the same time? Does the government factor that in?
Austin Wilson:
I don’t know, is your EFC divided by three?
Josh Robb:
Yeah, you fill one out for each student.
Austin Wilson:
Yeah and you have to do it every year too.
Josh Robb:
Yes.
Austin Wilson:
The FAFSA form is filled out before your freshman year yes, but before your sophomore year, before your junior year, before your senior year, whatever.
Josh Robb:
It’s re-evaluated.
Austin Wilson:
Yeah, so your income is then prior prior, re-evaluated. If your income’s going up over that time, obviously tuition’s probably going up over that time too. The numbers are completely different every single year.
Josh Robb:
Yep, every year it’s adjusted.
Austin Wilson:
It’s pretty certain that every single year you’re going to have a different number of aid, you’re going to have a different number of grants or scholarships or whatever. Very interesting.
Josh Robb:
And people in the universities who work in the financial aid section can make their own adjustments as well if they feel-
Austin Wilson:
Well there’s a wild card.
Josh Robb:
I know, they can say, “Okay, well I know this is here or that or I can make this…” They have that flexibility, which is to the positive too. They want to help, they want people to come to university.
Austin Wilson:
Exactly.
Josh Robb:
But there’s some flexibility there. It’s not a rigid thing although there’s some set numbers in here that there’s some flexibility in there as well, which is crazy.
Austin Wilson:
Yeah, so speaking of numbers, this expected family contribution let’s talk about how that’s calculated. It’s the biggest impact of how much a family is expected to pay is really determined by who owns the assets. 20% of a student’s asset count is available for college, so that’s money that they have, investments, maybe they have something handed to them, some money they received over time in their life. But 50% of student’s income are accounted for that, but the numbers look a lot different when you start looking at parents’ figures.
Josh Robb:
The reason for that is the person going to school, they expect them to have a lot of buy-in. You’re getting a value for this education, we want 20% of your assets to go towards this education and half of your income needs to be used towards… at least to be calculated towards this.
Austin Wilson:
Right, so half of your Dairy Queen $500 is $250.
Josh Robb:
Now remember, the EFC is saying how much they’re going to reduce what the financial aid is available for. They’re not saying between the student and the parent you decide how everything’s paid, but that’s what they’re not going to give you financial aid for.
Austin Wilson:
Exactly. Then when you start looking at parents things look a little bit different. Like Josh just said, as a student it’s going to be more of this is your baby, you’re going to own your education, and a bigger portion of that’s going to come from a student. Now the caveat is that that’s coming off of probably a lot smaller base. When you start looking at parents’ assets and parent’s income, so there’s some ranges here. Based on an income scale, depending on where you fall on this income scale, 2.6 to 5.6 of a parent’s assets are included in this calculation, and then 22 to 47% of the parent’s income are calculated into this based on that income scale as well. Yeah, it’s going to be bigger percentage of students assets and income, smaller percentage of parents assets and income, but when they’re blended together that’s the total picture that that expected family contribution is going to be calculated off of.
Josh Robb:
When we talk about assets too, there’s some that are excluded. When we talk about retirement plans, the government understands with pensions going away, they know that retirement assets are your sole source of retirement, so they don’t even include those. 401K, 403b, IRAs, those don’t even show up on this form. When we talk about 2% to 5% of your assets are accounted as a parent that doesn’t include that. For a lot of people their retirement plan is the big chunk of their asset. That is ignored so that’s a positive because they don’t want you to have to be taking those out to be forced to do that.
Austin Wilson:
In fact yeah, those withdrawals do show up as income out of your retirement account so you’d want to. In a perfect world if you can avoid it, avoid that. Also not included in the equity section or the assets section is the equity in your primary home or if you own equity in a business or whatever, totally excluded from the calculation. They don’t really want to penalize you for owning part of your home, whatever.
Josh Robb:
Yeah if you have a family business you don’t have to sell ownership of your business to go pay for college.
Austin Wilson:
Exactly.
[26:37] – Some Extra Facts & Tips
Josh Robb:
Swinging back around to the 529 and the Coverdell ESA accounts, how are those counted? Those are counted as assets of the owner, not the beneficiary. If you have a 529 plan and I open one for my kid, I’m the owner and then I name my beneficiary, which would be my kid. The beneficiary’s the one that receives the benefits, the owner’s the one who controls the asset. That’s important because you want a parent to be the owner because as we saw up there, if it was the child’s 529 plan 20% of that account would be forced or counted in that for the EFC. Since it’s an adult one it’s only up to 5.6.
If you’re a grandparent though, remember the parents are filling out this FAFSA form, they’re not even showing up. Even if this is beneficiary of the kid, that assets not owned by the kid, it’s owned by the grandparent. It’s not even shown anywhere in the EFC calculation for FAFSA. That’s a benefit there. Now the caveat to that though is when the grandparent distributes the money out and uses it for the college expense, that shows up as a kid’s income. Then that shows up as 50% of that income, reduces the next years FAFSA form. That’s a big impact. If they give $10,000 out of a 529 it wasn’t counted as asset, but now the student has $10,000 of income and they say half of that $5,000 reduces the next FAFSA forms and gives you higher EFC.
Austin Wilson:
Yeah, so any creative transferring that people think about between generations, between family members you have to be very, very, very careful of. There are, I’m sure, very good ways to do things and plan for things. Don’t do it the wrong way or else it could actually hurt you a lot more than it can help you.
Josh Robb:
Yeah, so one way that they do it is since… Remember they look at the prior prior year for income and that’s for the student and for the parents. If you start distributing out of grandparents 529 after that sophomore year, so January 1 of that sophomore year, the prior prior income, the junior and senior year won’t catch that distribution. If they’re going to a four-year college you wait until after that sophomore year. A four-year college, that’d be in that second year, the prior prior, that income will never show up. That’s a good way of using a 529 plan. The other way is, and we’ll talk about this, the Secure Act allows you now to pay off student loans. You could use a grandparents at the end to do $10,000 worth of student loan payments. There’s some ways you could use that to avoid the EFC calculation and then also use it to pay down for the beneficiary of the grandkid.
Josh Robb:
Going back to it as well, 529 plans, when it comes to contributions we talk about $2,000 limit for the Coverdell, 529s they’re limited to the gift tax rate. $15,000 and that’s per person per person you’re gifting to. If you have a husband and wife they each can do $15,000 and then grandparents and all that. Into a 529 plan you can put quite a bit of money and they have higher caps and limits. The idea there is there is a lot of flexibility there, so it’s not taxed when it’s considered a gift. If you stay under that limit no tax implication.
Ideally if a parent owns a 529 and a grandparent doesn’t want to open one, they can add to the parents 529 plan and it counts as a gift so there’s no tax impact and they can benefit the kid that way. There’s a lot of flexibility there. There’s also a five year, so you can take five years’ worth of your gift and lump it all into one so then you can’t give anymore during those five years but you can put it all in at once if you wanted to. There’s a lot of flexibility for those 529 plans.
Austin Wilson:
I know we talked about… a couple times we mentioned it and we have a whole episode on the Secure Act, but just to hit on how the Secure Act impacts college savings. The biggest impact was the ability to use 529 plan assets to pay off student loans like Josh mentioned. You can now pay up to $10,000 per beneficiary towards outstanding loans. This is another way that grandparents could use their accounts, this is what Josh just talked about, and not impact the EFC during the period they’re in school. And the Secure Act allowed 529 plans to be used for apprenticeships, so this helps if you have a child who has a skill or vocation that may not need a four year traditional college and yeah, so I talked about this in the episode about the Secure Act, but this is that provision where you can use your children’s college savings to pay off your outstanding old student loans. It’s an interesting loophole.
Josh Robb:
It is, but I think the bigger piece that hasn’t got as much attention is that apprenticeship. Before then 529 plans could only be used for higher education, so now offering that if a kid has this passion for some sort of skill that doesn’t need that, they could use those and benefit from those savings plans in order to enable them to get into that industry and into that job. It does open it up because especially with the cost of college going up, there’s a lot of times where a kid is interested in a certain skill, they could go that route and save a lot of money and a lot of debt and get into a great career.
Austin Wilson:
Yeah, yeah if you start something with not a hole, start without starting in the hole on a lot of things. You can really set yourself up for a decent career.
Josh Robb:
Yes definitely.
Austin Wilson:
Especially today like Josh said, things are going crazy.
Josh Robb:
As always thank you for listening. If there’s any follow-up questions you want reach out to us at hello at theinvesteddads.com. Kevin hopefully we answered some of these questions. There’s a lot of options out there. The biggest thing is making sure you timely fill out that FAFSA form because the sooner you do it the better because colleges are on an as needed basis, so when they run out of their grants and stuff then it’s loans. It’s first come first serve, so the sooner you can fill that out the better. They’ve actually moved it back, and I will say we joked about that prior prior year, that’s part of the reason why they do that is because everybody has two years ago tax return on hand. They don’t have to wait for if they’re delayed or extending it until October. They’re not at a disadvantage, they have two years prior of a tax return. That’s really why they do it, but still it’s a weird calculation of income.
[32:47] – Get Your Free Guide: Eight Timeless Principles for Investing
As always though, check out online, we have a free gift for you. It’s the list of eight principles for timeless investing. They’re eight overarching investment themes meant to keep you on track for your long-term goals. Check it out on our website at theinvesteddads.com. It’s free.
[33:03] – Our T-Shirt Giveaway is Almost Over!
Austin Wilson:
It’s awesome. And to help us to continue to grow this podcast and help a lot more people we need your help. We’re continuing our swag giveaway for another week to create some buzz through Apple Podcasts. This swag is really awesome, super soft, official Invested Dads T-shirts, and to claim yours you need to do a couple things for us. Number one, leave us a review on Apple Podcasts, a written one. Number two, screenshot that review and then email that screenshot to hello at theinvesteddads.com and we will follow up with the first 25 subscribers to get their shirt size and mailing address and hook you up with the swag. Let me tell you the shirts look amazing.
Josh Robb:
They’re awesome.
Austin Wilson:
I wear mine, it’s very soft, it’s very awesome, so shout out to Flag City Clothing in Finley, Ohio for providing those awesome shirts and making those. I will note that this giveaway is really only for North American subscribers only because of customs and duties and shipping and all of those things. That’s U.S., Canada, and Mexico specifically. Not that we do not appreciate our listeners around the rest of the world. We really do, but yeah due to some of those logistics we’re going to limit that a little bit.
Josh Robb:
We’ll blame it on the tariffs in China.
Austin Wilson:
That’s exactly it, it’s tariff.
Josh Robb:
Also, in case you missed it, check out some of our earlier episodes. We’re highlighting today the autonomous vehicles for super spies.
Austin Wilson:
Super spies.
Josh Robb:
That’s a fun episode we recorded a little bit ago. Check those out.
Austin Wilson:
If you enjoyed what you heard don’t forget to subscribe, share this with others if you think someone might benefit from learning about college savings for their children or grandchildren or whatever that may be. Otherwise we thank you for your time and really appreciate it. We’ll talk soon next week with our next episode.
Josh Robb:
Yep, talk to you later.
Austin Wilson:
Bye.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life leave us a review. Click subscribe and don’t miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management.
This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
