We are approaching the end of 2024, and it is a time when many people set goals for the New Year. It is a busy time, but it should include a quick review of your 2024 finances and preparation for 2025. For families in the thick of paying for college and student loan repayment, now is the time to do a review that could result in thousands of dollars in free money. Since the tax year and school years do not match, some actions may be required before 12/31 of this year.
This year was challenging for both FAFSA users and student loan repayment borrowers. We saw the initial implementation of FAFSA Simplification, which was a disaster. The DOE eventually resolved the issues for the fall for the 2025-26 submission. It was also a year of confusion and uncertainty for student loan borrowers in repayment. We had the implementation of SAVE, and then it was halted. Over 8 million borrowers are still in limbo until these lawsuits have a decision. On 1/1/25, excluding the SAVE issue, student loan repayment will return to its standard process rules for non-payment, which borrowers must know.
Tax Scholarship Planning
With proper tax planning, families can save thousands of dollars by using the tax code to their advantage. We call this planning “Tax Scholarships.” Many people overlook these strategies due to timing and lack of information. College funding and student repayment are complicated personal financial decisions that are often minimized. Families could save thousands of dollars with the right advice and planning.
These tax scholarships do not cost any money, and you can get free money back by understanding the different education tax rules. Each strategy is unique to each situation and person. How you pay for college and manage your income will directly impact your educational tax credits and savings. Below is a quick snapshot of the key areas to review. Each strategy has a more in-depth explanation of the benefits below:
- Financial Aid Position Planning
- Income Taxes and Financial Aid
- 529 Plan Review
- American Opportunity Credit & Other Tax Incentives
- Student Loan Plan/Review current Student loans
- Tax Review for the Student Loan Borrower
- Review Company benefits for Student Loan Allowance benefit
Parents and advisors must understand the financial aid process, college saving plans, educational tax credits, student loans, and student loan repayment to pay for college properly. This lack of college planning and transparency has resulted in student debt reaching over 1.7 trillion dollars. Student loan debt is the second-largest debt held by Americans, only behind home mortgages.
With IRS data directly integrated with the Department of Education (DOE) system, better tax planning is required. Here is a list of ideas that are often overlooked that you may find helpful for both maximizing 2024 and creating a better plan for 2025. The PayForED website provides valuable insights and software tools to help you during these educational and financial decisions.
Financial Aid Positioning Planning
One of the first things parents and students need to understand is their financial aid position. The financial aid term for this is your SAI or Student Aid Index. There are two methods of this calculation: Federal and Institutional. The Federal SAI is generated by completing the FAFSA form, and the most common method for the institutional SAI is the CSS Profile.
For most families, the most significant part of their SAI is their income, driven by a family’s tax information on the 1040. The FAFSA Simplification process makes this much easier since there is a direct feed to the FAFSA.
An essential aspect of this planning is understanding that the tax and school years do not match. This calculation should be reviewed before 12/31 of your child’s sophomore year in high school to maximize your financial aid positioning. A dependent student’s base SAI number will start with the tax year of the second semester of their sophomore year and the first semester of their junior year.
High School FAFSA Planning Calendar Example
Financial aid position planning is somewhat disconnected from the college application process due to a term called Prior Prior. The timing change was to simplify the submission process and add more transparency. With this change, families will have their taxes completed when completing the FAFSA, making the process easier and less stressful.
For example, a current senior completing the financial aid form will use 2023 income tax information for financial aid year 2024-25. The first-year financial aid submission is called your base year, and it is essential. The chart below will help high school parents better understand the timing of financial aid and the tax year used.
Income Taxes and Financial Aid
As stated above, a family’s income is usually the most significant component of its SAI. Most parents are trying to save for retirement and reduce their taxes. The most common strategy is contributing to a tax deferral program such as a 401k, 403b, or 457 plan. This modification is a significant benefit under the new FAFSA Simplification rules since these contributions are no longer included in the SAI calculation.
The traditional IRA contribution is still included since it resides on the 1040. This is related to the IRS data integration. A company deferred contribution plan would be beneficial since these dollars are counted up to 47% in the SAI calculation.
Please review the timing chart above to better understand the timing of these contributions to your financial aid position. For some, this will be a difficult decision. They will need to weigh the long-term tax deferral benefits versus the cash flow advantages of not making the contributions.
Estimating your SAI
A family must calculate their Student Aid Index (SAI) to evaluate their financial aid position. This term was previously called EFC or Expected Family Contribution. Most people believe it is one number. In reality, four separate calculations are summed to one number: parent Income, Parent Assets, Student Income, and Student Assets.
Understanding their SAI at each college will help families determine if they are eligible for need-based financial aid. Understanding your SAI number is the starting point and cornerstone of any good college funding plan.
Student Assets in Financial Aid Positioning
Another big myth in college financial aid positioning is to have no assets in the child’s name. That is not always true. To make the right decision, a family needs to understand the details of their SAI, which financial aid methodology each college uses, and the list price of that college or cost of attendance (COA).
If the parent’s portion of the SAI is greater than the COA, then the student’s assets will not affect qualifying for need-based financial aid. The student may still be eligible for merit-based money depending on their application strength for that college. You can complete the entire analysis if you have the details of the parent’s part of the SAI calculation. It is also important to know which SAI method each college uses on your list.
Here is an example of knowing your numbers and the common myth of removing all of the assets from the student’s name. The numbers below illustrate this.
Before liquidating any assets, you need to review this with your tax and financial advisor. There are laws and tax regulations that a parent could trigger, and these regulations may work against you. For example, the “Kiddie Tax Law” requires a student who has 2024 unearned income over $2,600 to be taxed at the parent’s income rate. If managed and liquidated correctly, this financial decision could be as high as 37% versus a tax-free gain of zero.
Using Grandparents or other Relatives 529 Money
Prior to FAFSA Simplification, payments made from non-parent 529 plans were included as student income the following year. The new rules will not include this money in the FAFSA calculation. These non-parent assets should be reported as other assets for colleges with a secondary financial aid process.
Under the SECURE Act, overfunding 529 plans is less of a problem. Money in a 529 plan can be used to pay down student loans up to $10,000, transferred to other children, or even rolled over to a Roth IRA. These new rules can be great for family members, especially grandparents, wanting to leave a legacy.
Grandparents and non-parent funds are outside resources. If the college can determine when these resources were used, then the student could lose some need-based financial aid dollar for dollar. The timing of outside resources is critical in lowering your out-of-pocket cost.
529 Plan Contribution Before 12/31
A common goal for many families is to start a college savings plan for their children or grandchildren. If this was a goal for 2024 or is a goal for next year, you should do it before December 31 of this year. Many states offer income tax deductions for contributing to a 529 savings plan. This advantage is why you should look at your state’s plan first.
Currently, 32 states offer some type of state income tax incentives. Many of these require a family to use their in-state 529 college saving program. Six states do not need the contribution to be to in-state 529 plans. These states are Arizona, Kansas, Maine, Missouri, Montana, and Pennsylvania.
These tax incentives for current college students are often overlooked. In most cases, contributing to a 529 plan while the student is still in college can offer additional tax benefits, depending on the state and plan. Most people think 529 plans are only a pre-college opportunity. Using the state’s income incentives can add up to thousands of dollars over multiple years, depending on the state. A 529 plan could enhance a family’s annual tax deductions and college saving opportunities.
Knowing the different state plans can work to your advantage if you have relatives who want to help pay for college. This could allow the donor to compare state plans and maybe open the plan in their state of residency or gift the parent the money if their state offers a better option. The donor should also consider other factors, such as the impact of financial aid and asset control.
It is essential to realize that these tax deductions follow a calendar tax year and do not have an extended date link to an IRA contribution. To get the state’s income deduction, you must do it before December 31.
American Opportunity Credit and Other Income Tax Incentives
Timing is everything in proper tax planning. Paying a tuition bill can make or break your ability to take advantage of an educational tax credit.
Many of these tax savings are often not properly planned since we do not think about our taxes until after the first of the year. As college funding has become more complex, families may need to review their year-end situation with their tax advisor before 12/31. This review will minimize the risk of forfeiting some of the educational tax incentives.
A good example is the American Opportunity Credit. Many families will use their 529 plan money to pay college bills. This payment may include the qualified expenses for tuition, fees, room, board, and books. If a family pays these costs with only 529 money, the family may be forfeiting a $2,500 tax credit. Under current tax rules, you cannot use the same qualified expenses for multiple tax incentives. In other words, if college costs were paid with only 529 plan money, a parent could not reuse those same expenses to qualify for the American Opportunity Credit.
To qualify for the American Opportunity Credit, the income criteria must be under $90,000 if filing as a Single or Head of Household and under $180,000 if filing a Married return. To receive a maximum credit of $2,500, the Single and Head of Household’s Adjusted Gross Income (AGI) must be under $80,000, and for the married filer, it is a $160,000 AGI limit. In addition, only certain qualified expenses can be used. These are tuition, fees, and books.
This payment method is a common mistake if proper planning is not done. If a family pays all of the qualified expenses using 529 money, they will not qualify for the credit due to the rule stated above. The solution is easy if you feel that you qualify for this credit. You could increase your payments for the upcoming semester. To fully take advantage of this credit, you will need to pay $4,000 of the qualified expenses. It must be paid by December 31.
Student Loan Plan
A missing piece of the college financial process is projecting the amount of student debt at graduation. Colleges only provide financial information one year at a time. As college costs continue to rise, more families must finance a larger portion of that expense. The problem with the current system is that parents and students are not able to envision the monthly payments after graduation.
Year-end may be a great time to review debt incurred and what the future looks like for your child currently in college. Our PayForED In-College Payer software helps students and parents understand their financial future by gathering current debt and projecting the debt needed until graduation. It will then calculate all of the loan repayment options and build a personal budget. As more students change majors and transfer, seeing the financial consequences could be very helpful.
As pointed out at the beginning of this article, student debt is a growing concern for our children’s financial future. Many studies identify student debt as a reason for delays in home purchases, marriage, and starting a family, to name a few.
For parents, People over the age of 50 are the fastest-growing group of student loan borrowers. Approximately 33% will be delaying retirement due to educational costs.
Reviewing Your Student Loans
Students and parents need their FSA IDs to review their federal student loans. First, log onto the StudentAid.gov website. Then, enter your FSA ID and password. Your student loans and federal grants will be listed. For parents, the Parent PLUS loans will be listed under the parent’s FSA ID.
Understanding the student loan structure is critical. The type of student loans used to finance a college education will dictate what loan repayment and forgiveness options are available for both students and parents. This planning is rarely done but could avoid surprises at graduation.
Many parents do not realize they are legally responsible for that debt by co-signing for a private student loan or taking a Parent Plus loan. The loan co-signer has the same financial responsibility as the student borrower. If the student defaults, this may affect the co-signer’s credit score and their ability to borrow other money.
Tax Review for the Student Loan Borrower
One of the new complexities of student loans is the increased use of Income-Driven Repayment (IDR) methods. Since 2016, IDR usage has increased by almost 170%. These methods make the monthly payment more affordable in most cases. The issue that most borrowers don’t realize is that they are tied to their Adjusted Gross Income (AGI) on their tax return. With the increasing use of IRS data, borrowers will need to do better tax planning.
For example, a married couple could have up to 126 options to select from, which is why they need to review their tax filing options. It gets even more complex for a borrower who recently got engaged or married in the past year.
In our blog, “Married Filing Separately with Student Loans,” we discuss the complexity of repayment combinations borrowers need to sort through. Borrowers should review how to file their taxes, understand how their student debt is structured, estimate future increases in income, and consider whether future employment decisions would qualify them for public service loan forgiveness.
2025 IDR Income Recertification Restart Issue
Due to the National Student Loan Forbearance, the DOE put the IDR’s annual income recertification requirement on hold. This process was extended numerous times but will start sometime in early 2025. This process is a big deal and a risk for IDR borrowers.
Many IDR borrowers have benefitted significantly from these extensions. Borrowers’ income has not been recertified since COVID-19 started. As a result, many borrowers’ payments are based on their income from 2020 or before. Once the recertification restarts, some borrowers could see their payments double, if not higher, due to these extensions.
As I stated earlier, the DOE systems are starting to require the use of the IRS data integration. It is not required for student loans yet, but we expect this to be mandatory in the coming year.
With increasing dependency on IRS data for income certification, the 2024 tax filing decision will be critical. If proper planning and analysis are not done, both incomes could be used when only one student loan borrower is using an IDR method.
Review Your Benefits
Student debt affects a large segment of the workforce. More employers have determined that offering a student loan assistance benefit is critical to building a well-rounded employee benefits package. Review your company benefits to determine if your company has programs to help relieve the stress of paying for college or the repayment of student loans.
PayForED’s suite of paying for college and student loan repayment solutions can now be found on a financial wellness platform as a voluntary benefit. Alleviating employee stress is crucial to creating a positive and productive work environment. Taking advantage of this benefit may help you make more informed decisions.
Under the 2020 CARES Act, employers have an additional tax-free incentive to match student loan payments. This incentive follows the same rules as tuition reimbursement under Section 127 of the IRS code. Employers could match up to $5,250 of student loan interest and principal payments made during the tax year of 2024. This applies to both federal and private loans.
College Funding and Student Loan Year-End Planning Summary
As you can see, paying for college and student loan repayment has become more complex. By being proactive, families and borrowers can make better decisions and lower their expenses. The PayForED approach simplifies college funding decisions so that students can envision their financial future and not be burdened with unexpected, excessive student debt.
If you have student debt, knowing all of your options is important. The growing problem is that borrowers expect the loan servicers to have all the answers. Due to the increased use of Income-Driven Repayment methods, personal fiancé and tax advice are required to get the best answer. The loan servicers legally cannot provide this advice. It is designed to help borrowers with student debt and help them understand all of the repayment and forgiveness options.
These decisions are the largest financial decisions parents make before retirement. PayForEd and the advisors listed on our website are trained in these various strategies.
