It’s too soon to know how the Tax Cuts and Jobs Act will impact families saving and paying for college. Everyone will be affected differently by the recent legislation, which has many moving parts. Fortunately, Congress ultimately scratched some plans that could’ve caused a train wreck for already-stretched college savers.

“The original proposal that passed the House would’ve been a big deal,” says Mark Kantrowitz, publisher of PrivateStudentLoans.guru and a noted expert on student loans, scholarships and financial aid. “It’s a big deal that it wasn’t a big deal.”

According to Kantrowitz and other college funding specialists, tax-advantaged 529 plans remain the best college savings vehicle. Interest on student loans is still deductible, and the final tax law also dropped provisions in the House bill that repealed education tax benefits.

Students meeting specific income limits can still take advantage of the American Opportunity Tax Credit and the Lifetime Learning Credit; graduate students won’t be taxed on the tuition waivers they receive in exchange for teaching classes; and employees won’t be taxed for up to $5,250 of tuition assistance offered by their employers. Scholarships and fellowships won’t be taxed either.

The new tax law also eliminates taxes on federal and private student loans that are discharged with the death or permanent disability of the student borrower—the canceled debt is now excluded from income. This change is limited to loans discharged between 2018 and 2025, Kantrowitz notes.

The tax reform also lets families roll 529 plans into (529A) ABLE accounts, which are used to fund education and other expenses for individuals with disabilities. However, the new tax law also introduces some measures that experts worry could hinder college savings efforts. A chief concern is that families of any income level are now permitted to use tax-free 529 plans to also pay for up to $10,000 of tuition per child per year in private elementary and high schools (including religious schools).

Andrea Feirstein, managing director of New York City-based AKF Consulting Group, a strategic advisor to 529 plans, is concerned parents may become so wrapped up in saving for private school that they forget to save or can’t save for college. Parents also may not realize they’ll need investments and share classes compatible with a shorter investment horizon, she says.

With advisor-sold 529 plans, she says, “I think it’s incumbent on the financial advisor to now say, ‘Are you hoping to use this for Katie’s kindergarten bill or her sixth-grade bill, or is this something we’re saving for Katie to go to Yale?’”

Families must consider their overall education goals for a child before reaching into a 529 plan and “robbing Peter to pay Paul,” says Michael Beloff, a CFP markholder with Barnum Financial Group in Shelton, Conn. He and Kantrowitz also note that K-12 private schools might take 529 assets into account when determining financial aid—even if families plan to use those funds exclusively for post-secondary education.

The tax law’s expansion of 529 plans also raises other concerns for Feirstein. Although she emphasizes that she is all for saving for education, “From a policy standpoint, I scratch my head,” she says. “Who are we really helping here?”

The assumption is that it will be mostly wealthy families. The plans have already come  under fire from Congress and regulators as college savings vehicles just for the rich (though she disagrees with that assessment). That could become a problem if Congress later reassesses where it could garner revenues. “If you’re sitting on a product that people think is a product for wealthy people anyway,” she says, “you just become a potential target down the road.”

Also, “When you give people a tax-advantaged way to save for parochial school or religious school or private school,” she says, “it’s often accused of being a next step towards vouchers for educations.”

The tax law did not eliminate another vehicle that already allows families to save for elementary, secondary and post-secondary education, the Coverdell Education Savings Account. Under this program, families can contribute up to $2,000 per year per child if their modified adjusted gross income for the year doesn’t exceed $95,000 for single filers or $190,000 for married couples filing jointly. (Single filers are ineligible after their AGIs reach $110,000 and couples are ineligible upon reaching a $220,000 AGI.)

Campus Considerations

The tax changes could meanwhile affect some schools’ financial aid. Roughly three dozen private schools face a 1.4% excise tax placed on the net investment income of large college endowments, which means those schools might decide to award less generous aid packages, says Kantrowitz. Colleges may also see a decline in charitable contributions, he says, as higher standard deductions for federal tax returns shrink the pool of taxpayers who’ll benefit from itemizing.

Jim Holtzman, a CFP, wealth advisor and shareholder with Legend Financial Advisors in Pittsburgh, thinks alumni will continue to fund scholarships at their alma maters because they often believe very strongly in doing so. However, he says, the tax changes might change the amount and frequency of donations.

The federal tax law’s new $10,000 deduction cap for state and local income taxes and property taxes could, in high-tax states, “crimp finances for families,” he says. He will run income tax projections for his clients to see how dramatic the true impact of all the tax changes will be for each of them, then help them figure out how they can adjust their budgets—including the education bucket.

He encourages his clients with college planning needs to look for schools that provide “bang for the buck” and to explore all scholarship opportunities. “Especially on the merit side, there are usually some hidden treasures out there,” he says. He’s also happy to sit down with clients’ children before they leave for college to help them understand finances and the big picture.

Beloff doesn’t think the new tax law will require dramatically different college planning. “In my experience, tax law changes generally don’t drive how or how much parents save, just where they save,” he says.

Contributing to the 529 plans in a number of high-tax states that allow a state tax deduction for their plans (including New York, Connecticut, Massachusetts and Maryland, to name a few) could be one of the remaining ways to reduce taxes that are no longer federally deductible, he says.

Families should also bear in mind, he says, that the big hike in the standard deduction on federal returns (now $24,000 for married couples filing jointly) could help buffer some of their lost state tax deductions.

Beloff, who works with many special needs families, is glad 529 assets can now be rolled into ABLE accounts, but he advises waiting for guidance from 529 and ABLE account companies before doing so. The maximum annual contribution for ABLE accounts, including those rollovers, is $15,000. Families who wish to move assets from one child’s 529 plan to another child’s ABLE account must first transfer the 529 plan to the child with disabilities because the tax law requires the accounts to have the same beneficiary.

A Multigenerational Endeavor

Peter Faust, a CFP and head of the family financial consulting program at Houston-based Tanglewood Total Wealth Management, is studying the ways the recent tax changes could affect the multiple generations of college savers the firm works with.

He’s helping participants in the program, the adult children of the firm’s wealth management clients, analyze their cash flows. They’re making mortgage payments, saving for their children’s education and sometimes still repaying their own student loans. “They want to get that elephant off their shoulders,” he says.

Some of Tanglewood’s wealth management clients have front-loaded five years of annual exclusion gifts to their grandchildren’s 529 plans—a strategy that remains available under the new law. The Internal Revenue Service bumped up the annual gift tax exclusion to $15,000 per recipient in 2018. Feirstein, the 529 plan consultant, says she is seeing a lot of prefunding of 529 plans.

Faust is curious to see how 529 plans adapt to the tax reform. “Will their investment platforms change?” he asks. “Will it result in lower fees if more assets do come in?” Tanglewood performs an annual analysis of states’ 529 plans and currently uses T. Rowe Price’s Alaska-based 529 plan because the firm thinks it offers reasonable fees and the best investment choices for its Texas-based clients, he says.

Faust is talking to clients about the benefits and unintended consequences of using 529 plans to fund K-12 private school. Tanglewood has developed an internal tool that helps families analyze how much it could cost them to send their children to K-12 private school and to public or private college and graduate school. “We look at it from an all-in, as best we can, educational cost framework,” he says.

Larry Pon, a CPA and CFP who runs the tax planning and financial planning firm Pon & Associates in Redwood City, Calif., was relieved the education tax credits survived Congress’s chopping block. Most of his clients have taken the American Opportunity Tax Credit and many also take the Lifetime Learning Credit.

Pon encourages families to take inventory of where they’re stashing assets for college. “We don’t want a grandparent or relative to gift some money to a child that’ll knock them out of financial aid,” he says. Furthermore, the new tax law changes the rules for the “kiddie tax” on unearned income (including interest and dividends) for children under the age of 19 or full-time students under 24.

This change could impact a Uniform Gift to Minors Act account (UGMA), a custodial account in which parents can save for a child’s education. Unearned income exceeding $2,100 in a UGMA account, previously calculated at the parent’s income tax rate, will now be calculated according to the tax rates established for trusts and estates. The top bracket (37%) kicks in when taxable income in a trust or an estate exceeds $12,500—regardless of whether a family has top-bracket income (more than $500,000 for individual filers, $600,000 for married couples filing jointly). Families must do the math carefully, says Pon.

He encourages families that won’t qualify for financial aid to take full advantage of 529 plans. “If done correctly, at least a third of your child’s education is going to be paid for by tax-free growth,” he says.

He also encourages families to consider overseas colleges, which can cost less than many colleges in the U.S. More of his clients are sending their children to school in Canada. Nearly 350 schools outside the U.S. qualify for 529 plan distributions, he says, and students may use federal student aid at hundreds of international schools.

As a rule of thumb, Kantrowitz, the financial aid expert, says it’s reasonable to borrow up to the four-year maximum borrowing limit of federal Stafford Loans ($27,000), but no additional debt. “If your total student loan debt at graduation is less than your annual starting salary,” he says, “you can afford to repay your student loans in 10 years or less.”

A final point to keep in mind is that reauthorization of the Higher Education Act of 1965 is likely this year, says Kantrowitz, and its House version proposes to drop federal Grad PLUS loans. “The war on graduate students isn’t over,” he says, although they were largely spared from harmful provisions in the final tax law.