​Ideas for paying for College Expenses with Coverdell, 529s, etc

6 Replies

I spoke to a ate-stage college planning specialist. He helps parents of high school students plan and pay for college using strategies such as merit aid, need based aid, tax planning, savings and investing for college, negotiating with colleges, scholarships and loans. Over the past 10 years Brad has directly helped hundreds of families plan and pay for college. He has provided in-depth college plans resulting in increased financial aid, scholarships, identification of the right schools at the right price, and better loans. Here are my take aways
• Coverdell has low contribution limits (2k per year) but the good thing is that it can be used for a wider range of education expenses • 529 is State sponsored and some states have special breaks based on where you live • Do the Coverdell first and then the 529 in most cases • Tuition, fees, computer, room and board, prescribed supplies, and groceries. Up to the cost of what the dorm would be. Sorry no beer • Need to start before high school or even when a toddler • You can transfer it to another brother or sister • Its rare to have too much money in a 529 • Consider making a higher rate of return outside a 529 • A 529 has a menu of choices just like the 401k • Show that you own nothing so that you don't make to much money to qualify for financial aid • The net value is what is important for financial aid • The look back is two years (prior prior year) but this changes from time to time • What about putting funds back in the grandparents generation? Gifts from grandparents are reported by income. So time it for the last year of college. • Can't use trusts to hide the asset, but can use irrevocable trusts • There are tax credits but check your taxable income so you don't phase out
Originally posted by @Lane Kawaoka :
• (1) Need to start before high school or even when a toddler
• (2) There are tax credits but check your taxable income so you don't phase out

Good Stuff, thanks for posting! A couple of comments

(1) If you pay Virginia income taxes the Virginia 529 plan has value at any time. You can put the money in and withdraw it for qualified higher education expenses at any time and receive a decent Virginia tax deduction. Definitely worth the few minutes of paperwork to cycle the money through the College Wealth (bank account) program. We took unqualified money, contributed it to VA529, sent it to the college a week later, and took a little over $900 off our Virginia tax bill for the year.

(2) Tax credits for education are based on adjusted gross income, not taxable income. (Sorry, my fanatically anal tax pro nature got the best of me!)

On the Grandparents' contributions - because the Student Aid lookback is now 2 years (prior prior), grandparents can help contribute during last 2 years without derailing student aid for the student.

There is a technique I've seen advocated here at BP where parents with rental properties employ their minor children to work on the properties, pay them, and put the money in a Roth IRA. Then when college comes the contributions can be used tax free for college. It looks brilliant on paper, but I do not personally know anyone who is using this strategy.

The oldest of our four kids is just applying to colleges and it has been very eye-opening. Because we homeschool our kids we had her start taking the SAT and ACT early. What we have realized is that there is a lot of merit based scholarship money available. We don't qualify for need-based assistance, so the merit based scholarships are crucial. She got a 34 on the ACT and has a 3.917 GPA. Colleges are throwing money at her. It is definitely worth having your high school freshman begin taking and getting used to the standardized tests and studying for them. She used Khan Academy as well as cracking the SAT. It is also worth applying to multiple colleges. She is applying to 17 schools anywhere from the University of Maine to Princeton. All colleges have a net price calculator on their financial aid pages and it is fascinating to see the huge differences in net price. Turns out that schools like Vanderbilt, Princeton, and Johns Hopkins are much cheaper than you would expect.

One more tip: the SAT and ACT are not intelligence tests. They merely test your ability to take that particular test which makes studying for them well worth it.

Hope this helps!

Have them wait until they are 24 and your income doesn't matter. Apply for schools out of your immediate area because schools like geographic diversity, especially the smaller private ones. That said a couple hours distance may be enough. Have the student narrow their choices to the type of school they want to attend so they aren't wasting time and money on schools they will never go to because of size, distance or just poor fit. The last thing you want is a transfer or dropout after a year. 4-7 schools is reasonable to apply to. SAT and ACT scores are helped by reading and doing math throughout high school. Not saying you can't study but it's not cramming for the test a foundation early helps. Community/state college is an option but count on paying the full tab.

@lane k. Rules change a lot and the FAFSA is a challenge you might as well opt out at state schools if you make any money. My older son dropped out and worked for a bit so he is on his own now for financial aid. Many of the rule changes originated from deadbeats who failed to pay student loans as they did not go on your credit report years ago. However I am happy to hear the tax on tuition remission for grad students is being dropped in the tax package. We did pay our son and put it in an IRA but he was already 15 so not much benefit.

@Lane Kawaoka

This is a great idea for a forum thread. I talk about this topic a lot in my accredited investor group. I think part of the issue many parents are having (even many investor parents I meet) is they're often asking themselves the question "How do I save for college?" rather than "How do I make money for college?" 

According to the US Department of Education, the average annual cost of public school increased 6.5 percent each year over the last decade. That means that by 2030, annual public tuition will be $44,047. The total cost for a four-year degree will be more than $205,000. So both of my sons are finished with school but I do have a 1 year old grandson, so it looks like by the time he's college age it'll cost upwards of a quarter MILLION dollars to probably go to even a regular state school. Sure, $250K won't be the same then that it is now, but it's still a large chunk of change to work towards saving.

None of these plans make it completely easy. I do like what some things like the Coverdale have to offer but I found with my youngest son, my original point was what worked best for me. We invested the money, rather than saved the money to pay for his tuition.

So here's what I mean by that:

This is a strategy that could hold true for any form of debt like this but we figured out a way to employ two different investing strategies together to pay for his college with a fraction of the money. So instead of my wife and I just writing a check, my son took out a student loan and my wife also took out a student loan. The main reason we did this was not just because student loan interest can be deductible, but because if we could use the borrowed money (at approximately 6 to 7%) to pay for tuition and our money stayed invested (at approximately 12 - 18%) making a substantially higher yield, that alone would offset the cost of his college. But it gets better than that.

Some loans you don’t have to make payments on right away and some even have deferral periods until after graduation. Some student loans for example have a six month deferment period, usually put in place so the student can find a job by that time. This gave us even more time to earn more arbitrage money even longer. The second part of the strategy has to do with the timing. Right before payments on the student loan were coming due, we purchased a re-performing Note with a similar monthly payment and a term that was actually a longer time frame than the student loan. We purchased this note for a significant discount. Many re-performing second liens like the one we purchased can be bought from anywhere between 40% to 60% of the payoff (though this can vary depending on the current note market), and the payment we receive from said note was used to pay the student loan payment. And this note still even pays us today! So we paid for roughly $100,000 worth of college tuition, with just under $40,000! This can be done with other cashflowing investments but since notes are my expertise, it seemed like a good fit.

Plus we partnered that with a grant and we showed little to no income due to some other creative tax and holding strategies and voilà...very affordable college.