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.