Early Preparation Can Take the Pain Out of College Payments

By Cristina Wiebelt-Smith, CPA, Associate Wealth Advisor

We’ve really enjoyed having our daughter home for Thanksgiving and Christmas break after her first semester away at college – 1,200 miles away!

You know what else we’ve enjoyed? Not paying tuition in November and December. I think the school understood parents wouldn’t be happy paying tuition, room and board when their child was at home for five weeks!

Our daughter is a bright student and got a great scholarship, but we pay the equivalent of room and board out of pocket. Do I wish we had saved more for her college? Of course. But there are some simple things we did to prepare for that change in cash flow, and depending on where your family is on the educational journey, there are several things you can do as well.

Let’s start with what you can do between birth and the day that little bird flies out of the nest.

  • Start saving early and often. Time and the compounding of earnings are your friends. A 529 plan is one way to start – it’s simple to set up online, the earnings grow tax-free, it can be used for K-12, college or technical school and there may be state tax benefits. Some states offer a state income tax deduction to any taxpayer who contributes to a 529, including grandparents, other relatives and friends. Missouri has a deduction of $8,000 for single filers ($16,000 for married filing jointly) for contributions made to any 529 plan. It does not have to be a Missouri plan to get the deduction. In our family, we have two Oklahoma plans, a Virginia plan and a child in school in Pennsylvania – contributions to any of their accounts qualify for a deduction on our Missouri tax return. The contribution limits depend on your home state, and Missouri actually has one of the highest at $550,000 per child. Yes, you could dump $550,000 into a 529 account for a child in one year, but once you’re over $15,000 (2021) or $16,000 (2022), you’ll need a gift tax return.


  • Ask your family and close friends to contribute to a college fund when they ask for birthday and Christmas gift ideas. Share the link to the 529 account, or the coupons if they want to mail it. They can even set up their own separate 529 account for the child – just watch that $550,000 limit.


  • Take AP Classes. Advance placement classes allow high school students to take an exam, and if their score qualifies, they earn college credit without taking the class. The fee to take an AP exam is about $96, which is a lot cheaper than paying for a college course. Some colleges limit the number of AP credits a student can have, and there are a few private schools that don’t accept AP exams for credit, so do some research about the schools you’re looking at.


  • Once your child is in high school, have them apply for any scholarships that you think they might remotely qualify for. It doesn’t always have to be a perfect match, so it’s worth a shot. Scholarships are free money that can be based on merit or need, so if your income is high, this may be your best bet. If your student gets a scholarship, see if it is renewable and then make sure they reapply! My sister gave me some wonderful advice: create a folder or online document to track all of their awards, volunteer activities, leadership roles, sports, jobs and other extracurricular activities so the application can shine and stand out from the others! Anything odd or unusual? Be sure to add it in! (This is also very helpful for college admissions, as well.)


  • Fill out the Free Application for Federal Student Aid (FAFSA), even if you don’t think you will qualify for financial aid. The process opens in November, so be ready to apply right away – some of the money is first-come, first-served, and it can affect work study opportunities. If you get a late start, the official deadline is June 30, but I don’t recommend procrastinating on this one! To be ready, have a folder or easy access to your prior two years of tax returns, most recent paystubs, business tax returns, latest bank statements, investment statements, college account statements, mortgage information, debt balances and any other documentation that has a financial impact on your family. One of our clients had a report that printed with her tax return listing out all numbers needed for the FAFSA form. That was the first time I had seen that, and it’s amazing if you can get something like that from your tax preparer!


  • Check the deadlines for college applications, scholarships and FAFSA during your child’s junior year (or sooner) so nothing is overlooked. Create a calendar with all the deadlines, because it can get confusing depending on how many schools and scholarships they apply to.


A Coverdell education savings account is also an education savings account that is tax favored. The earnings grow tax free and just like the 529, the distributions may be excludable from income if used to pay for qualified educaiton expenses. One of the differences compared to the 529 is that contributions to a Coverdell are limited to $2,000 per child.

There are also UTMA accounts which are your regular investment accounts in the child’s name.

Something to keep in mind: Any accounts in the child’s name will have a greater impact on their financial aid calculations than an account owned by the parent or grandparent. The child is still the beneficiary, but the further removed the owner is from the child, the less it affects the FAFSA numbers. Withdrawals from an account owned by someone else, such as a grandparent, may be counted as the student’s income.

Be mindful of your taxable income during the FAFSA years and do what you can to keep it as low as possible. Managing taxable income is a big part of our financial planning process. What pre-tax deductions – such as 401(k) contributions or childcare – are available through your employer? Can you make HSA contributions? Did you take the charitable contribution deduction available to even standard deduction filers?

After you digest this, we’ll be back in the next blog to cover some additional savings vehicles and tax credits. There are tax credits available for tuition and fees paid.

  • the American Opportunity credit provides a credit of up to $2,500 for post-secondary education expenses of each eligible student on at least a half-time basis; and
  • the lifetime learning credit provides a credit of up to $2,000 per taxpayer for post-secondary education expenses of eligible students, including technical or remedial training—as long as the training is to acquire or improve the job skills of the individual.


Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighed factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state’s 529 Plan.

This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

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