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Changes to college savings

 

Change your thinking! Don’t get stuck following old rules. Tax-favored college savings plans (know as 529s) have had several changes in the last couple of years, and more are upcoming for 2023-2024.

1. You can use them for a kid’s elementary and high school tuition, whereas they were only available for college in previous years. Why would you want to do this? Maybe the child is going to an expensive private school pre-college, but you’re expecting a somewhat cheaper, perhaps state university. Or, the grandparents have set aside significant money or promised to fund college. Or you have stock grants that will vest in 3 years, in time for college but not available now. Usually, the big-ticket item is college, but not necessarily.

2. Federal aid formulas will no longer count grandparent contributions withdrawn from a grandparent-owned 529 plan as student income, as of 2023-2023. It will not be counted against the student for financial aid determinations. Of course, this is only important if the student would be actually eligible for federal student aid. Private colleges can ask about anything they want, and use it in their own private formulae for awarding their own, non-federal funds.
Nearly all private colleges will require the family to file a FAFSA form, but even if a family doesn’t qualify for federal aid, they may still qualify for aid from a private college, especially if the school is seeking to attract the student. But don’t depend on it, and don’t brush off saving with the tired, “My kid is so smart they’ll get a scholarship”. So is every other kid. Don’t bank on it (pun intended).
3. You can contribute more, and you can front-load (as in, you got a bonus or windfall). In 2023, the annual gift tax exclusion rises from $16,000 to $17,000. This applies to each beneficiary, from each donor/giver. Each single yearly gift to each recipient cannot exceed $16,000/$17,000. In addition, there’s a provision for “front-loading” by giving 5 years’ worth of exclusions in one lump sum ($80,000/$85,000 per donor), using up the gift tax exclusion of each donor. But what if you wanted to give more—say, $20,000 to a grandchild per year? The grandparents will need to file a gift return documenting how much more they’ve given, which will count against their lifetime exclusion of $12.6 million. If you anticipate your estate will exceed $12.6 million, your heirs will need to present copies of your gift tax returns. Note: no gift tax is due at the time you give the money—you’re only creating a record to be applied against your estate. Most people will not have a estate that meets the $12.6 million threshold, so likely no gift tax will ever be due. You just need to keep the record and file the form.

4. You can rollover a 529 account to an ABLE account, up to the annual contribution limit In the tragic event that your child becomes disabled before age 26, the money can be transferred to an ABLE account to fund qualified disability expenses, including housing and education. This is a somewhat complex procedure and you’ll probably need to see me about your specific circumstances, but it does allay one fear of contributing—that the money will not be lost or taxed if the child doesn’t go on to further education.

College contingency plans

Gandalf and FrodoI’m a big fan of always having a plan B, and having more than one stream of income. You can only control you own actions, and try to have a plan on how you might cope with unexpected events. That’s why we diversify our portfolios, have an emergency fund, and try to think of some type of side job that keeps some money coming in if the main gig goes kaput. The era we’re currently enduring highlights the worth of these principles. So let’s apply them if you, or your nearly-adult child, is in college at the moment.

If you’re returning to campus

I wouldn’t. If we view the recent experience with the Univ. of North Carolina at Chapel Hill, it’s entirely possible that schools that open will rapidly close down. This means that all the expense of moving clothes and tiny refrigerators, purchasing sheets for the extra long twin that exists nowhere else on earth, getting there, getting a college wardrobe (often for a different climate than where you live), etc., will all be spent again getting out of there. It’s easily hundreds, if not more, directly down the hairy dorm drain.

Nevertheless, I see the desire to get rid of parents/kids and live your life independently. I’ve heard that some students are still renting apartments near campus and using those as a base to study remotely. My concerns, as might be anticipated, are about health (and costs).

  1. Sign a HIPAA form. Without permission, a school or health service cannot discuss student health with parents. Often the school will include these with registration, but double check to make sure one is on-file with the student health service and if possible, with the local hospital and any doctors that the student may use.
  2. Double check insurance. Some types of insurance may not have in-network providers in the campus area. Know what and whom the insurance will cover, and take a list of in-network hospitals and maybe a few names of internists with you. Bookmark the insurance tool that allows you to check whether a health provider is in-network. You don’t want to be scrambling to find this out in an emergency. If your health insurance is lacking, you may want to purchase the school’s insurance, if only for backup.
  3. Where is the nearest emergency room? For urban campuses, there may be a choice and the whole family should know where the student would go (or where EMTs would take them), so that no one has to experience the horror of calling around to find someone.
  4. If you need medical care, how will you get there? What if you’re too sick to drive, or call a ride-share, or even walk to the health service? Does the school have anyone to send to check up on you, or are you dependent on friends (who may also get sick)?
  5. How will you get food or prescriptions? Even well-intentioned friends may not be dependable for three meals a day for many days. They also may not be eager to get something contagious. This is even harder if you’re not living in a dorm with food service. Be sure you know what pharmacies, groceries, and restaurants will deliver, and if it applies, whether they’ll deliver to a dorm.
  6. Have a credit card. Okay, maybe everyone does but these have more protection than a bank debit card. This is one instance where student and parent should be able to see charges coming up as an alert, and because fraudsters are happy to take advantage of the sick, the protections are worthwhile. Even being on a parent’s account builds credit history.
  7. You might need an emergency fly out plan. More than one university closed its dorms while students were on spring break. Students were then faced with returning to campus to clean out their rooms. This would be a really good time, if returning to campus, to take only the minimum with you until we all see whether this is going to work.

If you’re working remotely

Yeah, we’re all climbing the walls. There’s little that will substitute for the chief advantages of learning IRL. You won’t get the spontaneous conversations with professors and students; won’t get a campus job assisting a prof; won’t get the late-night debates about profound life issues; won’t get to meet famous people brought on campus; and will have a much harder time getting drunk and getting laid.

However, actual college study is much more about what you do yourself—reading, thinking, forcing yourself to develop your writing and argumentation skills. In fact, learning remotely is much more about self-instruction, with the advantage of professorial guidance and, most important, personalized feedback—the one thing that is hard about self-instruction. College is a great time to become the person responsible for your own learning. While you may be accountable, and appreciate the accountability, nobody is going to track you the same was as in high school. Even on campus, many people can’t muster the self-discipline, and those people are called dropouts. Work your goals: you’re in control of your learning.

Sure, it’s not what you dreamed of. Sure, it’s tough and you’re missing out. So is everybody. It’s a great time to learn to roll with the punches and make the best out of a bad situation—a most valuable and frequently used adulting skill. Don’t hesitate to get help—you don’t have to “desperately need it”. Therapy or counseling can also be growth enhancing, helping you to a better life. Most mental health professionals are doing tele-health appointments, and many insurance policies will cover those, at least right now.

On the other hand, you might find that you have more time than what you’d have on campus. You’re not walking to class, and you’re probably not going to parties, working, or hanging out in the campus cantinas. This is a great found opportunity to learn something additional—coding, home repair, guitar, adulting skills. My most recent newsletter had a much longer article on these ideas, so email me if you’d like a copy.

“I wish it need not have happened in my time,” said Frodo. “So do I,” said Gandalf, “and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us.”

Challenging College

For about 10 years now, I’ve invited anyone to tell me about someone they personally knew, whose family did not have financial need, who got a free ride for all 4 years at college. By free ride, I mean all expenses paid, not just free tuition, and not just a one-year fellowship or grant of some kind. Finally, someone has come up with this plum, the result of a Facebook discussion. She sent me this list, which is interesting to review. Upon drilling down, however, many of the awards on this list are—you guessed it—tuition only. She also told me she knew of a student at the University of Delaware (un-named) and that her own child had gone to the University of Central Florida with only $500 in costs of books, and transportation costs to get there. Score! Someone did it!

One of the most generous on the above list appears to be the one at Duke. Drilling into their website, they currently have 122 people (across all four years) who are Robertson Scholars. Duke has a student body of 15,192, which means 0.08% of the student population managed to land this. There are currently 21 freshman Robertson Scholars. Duke received 41,000 applications for the freshman class, giving an individual student a 0.005 chance of landing one of these awards. In other words, slightly better than a snail’s chance in hell.

Here’s another list I found through our old buddy, Google. If you look at these, you’ll see that a lot of them are also tuition-only, or for one year, or you have to be on campus already, or they’re for a very small number (sometimes only 1) student in a huge student body.

You may think this has changed my opinion. You’d be wrong. But I’m now willing to acknowledge that someone, somewhere, has actually gotten a full “free ride”, for college. But don’t plan on it unless you can guarantee your student will meet all the following conditions:

Be willing to go to any school that accepts them

I’ve yet to hear about an Ivy League quality school. Indeed, even needy students that get free tuition from an Ivy often find themselves in deep debt for living expenses, because in many schools aid means loans as well. Getting in at all is a real challenge. The New York Times just published an excellent long-form piece on low-income applicants, and the calculus of admissions. Even though they mention that 89% of students get aid, guess what? That includes loans. It’s a must read for any family going through the application process.

If your student is pragmatic enough to choose schools by aid packages instead of prestige, you may have a chance at an award from a school where the profile of the student body is far less academically qualified than your student. Yes, I believe the student and their motivation is more important than the school, but having been to state schools and big-name schools, and having a daughter who also matriculated through both, I can confidently say there is a difference in quality of instruction and student experience. No one has ever asked me for my grades; I graduated magna cum laude from Northeastern Illinois, and well, I graduated from the University of Chicago—but the later is the only cred that has ever counted for anyone.

Be really, truly extraordinary

That means, be a National Merit Finalist, at least. There were 15,000 last year, of whom 2,500 actually got a lousy $2,500 scholarship—but schools look very favorably on them. Or win the Intel, or a Davidson or some other nationally-ranked competition. Publish a commercially edited book. Be an activist or humanitarian who’s been on national news. I don’t care if your kid tested profoundly gifted or has a perfect SAT—yawn, I know quite a few for whom that didn’t even guarantee admission.

Be absolutely certain to major in a field corporations want

This means engineering or computer science. Ha, ha English or Italian literature majors. Because you’re just not worth paying for if you’re not in an “economically useful” STEM field—what’s a liberal education worth anyway. Let’s all support college as a trade-training mill. And quit your major (engineering is one of the most dropped)? Bye, scholarship.

Be willing to go to a region where no one in their right mind from your area would go

Hello, northern urban person. Enjoy Podunk U. The football games are great. Lotsa school spirit.

Get in.

Any school that has even a slight whiff of full-ride programs will immediately get far more applications, which will mean that your student will have even less chance of actual admission than they might have had before such a “generous” policy was announced. And if you refer to the NYT article above, you’ll see that making the school aware that you need financial aid seriously impacts your chance of admission at all, whatever they’d like you to believe.

It’s not quite as hard as finding a virgin to catch a unicorn. But assuming your kid is smart and will get a “scholarship”–ergo you don’t need to save–is not a financial plan. You’re going to need one.