The Latest College Scene

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 Interest on student loans is still deductible, and the final tax law also dropped provisions in the House bill that repealed education tax benefits.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.