Greetings Wela Family,
We hope everyone has had a fantastic summer filled with memories and laughs shared with loved ones. As summer begins to wind down for students and their families, now is the perfect time to discuss college planning and what items to consider when sending your children off to their next educational adventure. In this month’s financial planning newsletter, we have curated a checklist to consider when funding children’s education and will delve into some education planning topics in greater detail.
The Free Application for Federal Student Aid (FAFSA) is integral to determining college funding eligibility. The period for applying for aid is crucial, as some aid is on a first-come, first-served basis. For the academic year starting in Fall 2025 and ending in Spring 2026, FAFSA becomes available on October 1, 2024, and closes on June 30, 2025.
A key component in determining eligibility for financial aid is the Expected Family Contribution (EFC), which considers income and assets from both the child and their parents. A student’s assets count more in the calculation, currently at 20%, whereas parents' assets count at a maximum rate of 5.64%. Additionally, 529 plans owned by grandparents are not reported to FAFSA, and under new changes, distributions from these plans will no longer be reported as they previously had been for the child. This change takes effect for the 2024-2025 award year.
Helping children save for their education can be attractive due to custodial accounts with tax benefits. Contributing to a 529 plan is viewed as a gift. In 2024, gifting up to $18,000 to a 529 plan will not result in gift taxes. Married households can elect to "gift split" and double their contribution to a 529 plan by combining both of their exclusions. For example, grandparents can contribute $34,000 in 2024 to their grandchild’s 529 plan and, if appropriately filed, can pay zero gift tax since they combined their annual exclusions ($18,000 each).
Another method to help with education expenses is making a payment directly to the educational institution. If a direct payment is made, this is excluded from being a taxable gift. For example, if an aunt pays $20,000 directly to her niece’s university for tuition, she would not have to file a gift tax return (Form 709), even though the amount exceeds the 2024 annual exclusion of $18,000.
It is important to note what constitutes qualified education expenses, as each funding vehicle has a different list of qualifying items. The most common education-related benefits with varying definitions of qualified expenses include scholarships, Series I bonds, Coverdell ESAs, and 529 plans.
For scholarships, qualified expenses include tuition and fees, books, supplies, and equipment required for courses. Room and board are not qualified expenses and can result in being added to income.
I bonds are another method of saving for college. Like scholarships, room and board are not qualified education expenses, nor are books. Qualified expenses for I bonds include tuition and fees and any amount redeemed and put into a Coverdell ESA or 529 plan.
One of the most popular methods of saving for college expenses is using a 529 plan. 529 plans and Coverdell ESAs qualify the same expenses: tuition, fees, books, supplies, and equipment needed for classes. These accounts include the cost of room and board as a qualified expense to the extent that it is not more than the greater of the allowance for room and board determined by the institution or the actual amount charged if the student lives in property owned by the institution.
We hope this checklist provides clarity around the college milestone and helps create an actionable game plan. We wish everyone an exciting upcoming school year and safe travels for all students heading to their respective universities. As always, if there is anything discussed in this newsletter that we can elaborate on, please feel free to reach out to your Wela Client Advisor!
All the best,
Wela Financial Advisory
Brent Forrest & Associates LLC. dba Wela Financial Advisory is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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