Written by: Matt Escalante
We all know kids can be expensive when you add up the costs for everyday essentials such as food, clothing, daycare, etc. (just to name a few). The moment a child is born, the clock starts ticking on developing a proper plan for one of the most daunting expenses: funding a college education. College funding is one of the most significant expenses in anyone’s life, whether you’re paying for it for yourself, your child, or your grandchild. The cost of attending college continues to raise at a pace approximately double the rate of annual inflation.
When developing a plan to fund a college education, it helps to start by identifying the total annual cost; the cost of college is so much more than tuition, fees, books, and housing. You must also consider the cost of living: meals, travel to and from campus, extracurricular activities, etc. Once the total cost has been identified, consider these three areas as sources to funding a college education: Savings, Tax Credits, and Grants.
When my son was born back in 2011, I immediately knew that opening a 529 plan would be high priority. The question quickly became which program would I use. Section 529 plans have become the most popular vehicle for college savings. Each state can sponsor its own 529 plan, and some even offer state income tax deductions for using the 529 plan of the state in which you reside. Since I reside in a state that does not have state income tax, there was not tax advantage to use the 529 plan sponsored by my state. That means the 529 plan universe was open for my consideration. Contributions to a 529 plan are invested and offer tax-deferred growth. As long as the money is used for a qualified expense such as tuition, fees, books, or supplies, the distribution is tax-free. Additional benefits of the 529 plan include:
- Five-year accelerating contributions allow an individual to use up to five years of annual gift exclusion in the first year
- As of January 1, 2018, money from a 529 can be used for elementary or secondary public, private, or religious schools, up to $10,000 per calendar year
Once I finally opened a 529 plan for my son, I very quickly discovered one additional benefit… The willingness of grandparents, aunts, and uncles to make contributions during birthdays and holidays!
Think of a grant as a gift that doesn’t need to be paid back, unlike a loan which requires repayment over time. Grants are considered based on the needs of the student and the cost of attending a college. Federal Pell Grants are issued by the government to undergraduates in pursuit of their first bachelor’s degree. The Federal Supplemental Educational Opportunity Grant Program is also available for students with financial needs. This is also a grant program that is managed by the college instead of the government.
The American Opportunity Tax Credit provides an opportunity to reduce your tax liability in a given year where you incur qualified education expenses for yourself, spouse, or dependents. The tax credit equals 100% of the first $2,000 of qualified expenses paid, plus 25% of the next $2,000, resulting in up to a $2,500 tax credit in a given year. The credit is allowed to be applied per student, per year. There are a few requirements that much be met to qualify:
- Room and board expenses are excluded
- The student must be enrolled at least half-time
- The credit is subject to phase out based on income
In addition to these three key funding sources for college, parents and students can explore a variety of loan and Financial Aid options based on credit score and/or need. Financial aid packages are often made up of a combination of student loans, grants, and tax credits.
Senior Director of Institutional Investment Strategies
Matt Escalante, CFP®️ is a Partner at TCG and Senior Director of Institutional Investment Strategies. He started his career in financial services with Northwestern Mutual Financial Network in 2005 and soon after joined TCG in fall of 2006. Matt’s desire is to help others achieve their financial goals and to establish strong relationships. With a family background deep in educational leadership, TCG was a natural fit for Matt to help educators achieve their financial goals.
Over his time at TCG, Matt has held a variety of positions including Investment Advisor to private clients, Regional Sales Director, and Senior Director responsible for working closely with clients to develop retirement planning education and engagement activities for their employees. In his current role, Matt leads the group retirement plan advisor team who develop quarterly investment reviews and present to investment advisory committees established by clients.
Matt received his BA in Business Management from California State University, Fullerton. He
had also acquired the Series 6 and 63 FINRA securities licenses and CA insurance license during his time at Northwestern Mutual Financial Network. Matt earned the CERTIFIED FINANCIAL PLANNER™ designation in 2019.
Matt and his wife Megan have two children, Jack and Paige. Matt enjoys playing golf, fishing with the kids, and staying active in the kids’ sporting events.
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