Episode #10 of Intentional Wealth:
College Planning and Funding with Tammy Pompei, CFP®
November 18, 2022
In Episode #10 of Intentional Wealth, host Amy Braun-Bostich is joined by Tammy Pompei, CFP® and Associate Financial Planner at Braun-Bostich & Associates, for a round-table talk to discuss the importance of integral financial planning when it comes to funding your child’s education ─ planning that doesn’t jeopardizing your retirement income.
Listen as Tammy and Amy talk through many of the aspects of planning for college including costs, financial aid, who should pay, and funding options.
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Welcome to Intentional Wealth, a monthly podcast where, alongside notable financial professional guests, Private Wealth Advisor and Founder of Braun-Bostich & Associates, Amy Braun-Bostich, delivers useful insights and strategies that help YOU live your best financial life! Remember, when your goals are meaningful and your wealth has purpose, you can truly live with intention.
Amy Braun-Bostich: Welcome back to Intentional Wealth. Today I'm joined by one of our own, Tammy Pompei, a Certified Financial Planner who's been with our firm since 2015, and I might add an advisor that many of our clients have quickly come to trust with their financial life planning.
As you'll glean from our discussion today as a firm, we've historically urged our client parents to start thinking about college funding sooner rather than later. But regardless of how you choose to save for your child's college, one of the best things you can do is save early and save often. With that brief introduction said, I welcome Tammy to Intentional Wealth to join me in discussing the ins and outs of college planning and funding in particular, How to pay for your kids' education while keeping your retirement plan intact and on track. So happy you're here, Tam.
Tammy Pompei: Hi Amy. Glad to be here!
Amy Braun-Bostich: Yeah, thanks for joining me today. Okay, I know we have a myriad of things to discuss surrounding this topic, so let's start by talking about cost specifically, how much will college cost these days, including living expense?
Tammy Pompei: Okay, great opening question. The average estimated full-time cost of undergraduate tuition for the 2021-2022 school year was around $11,000 for in-state public universities and about $38,000 for private universities. This does not include room and board, books, supplies, transportation, and other expenses.
Adding those costs in would run you another $11,000 to $13,000 annually, and the costs vary widely. For example, the University of Pittsburgh will set you back about $35,000 a year for a student living on campus while a student attending and living on campus at Carnegie Mellon will pay upwards of $79,000 annually.
But you may not end up paying this sticker price depending on availability of scholarships and other sources of financial aid for you.
Amy Braun-Bostich: Yes, that's an important factor. Eligibility for those can bring down the cost substantially. I have not actually seen that happen in my own life, but perhaps some of our listeners have.
But here's a question I know many families face: Is my family's income too high to qualify for financial aid?
Tammy Pompei: Well, the definitive answer is maybe. Having a higher income could work to your disadvantage for some sources of aid, but it's still worth applying to see what you or the student might be eligible for.
This is because colleges consider more than just income. They look at things such as the number of family members in college, medical expenses, and even if you think your income might be too high for aid, the college board still recommends that you fill out the free application for federal student aid, also known as the FAFSA, and do this as soon as possible.
It will determine your eligibility for federal and state student grants, work study programs, and even federal loans. The best way to estimate how much financial aid a college will offer you, and then meaning how much you'll pay, is to use a net price calculator and you can find this on most college websites.
The net price is the cost of attendance, minus any scholarships and financial aid the student will receive.
Amy Braun-Bostich: Okay. Well, let's say you've been able to significantly reduce the total cost of attendance through these measures, should I still have my child pay some of his or own expenses at college?
Tammy Pompei: Absolutely. If possible, having the student contribute toward their own education, even a small amount, could give them a sense of independence and satisfaction because they're helping pay their own way, even if they don't realize it at time.
It could give your kids some skin in the game and keep them invested in their own education. Sometimes we tell client parents to make their students an authorized user on their credit card, you know, which could be used for small purchases and emergencies. This allows the parent to monitor the spending and also might allow the kid to boost their credit a little bit too, especially at such a young age.
Amy Braun-Bostich: Yeah, I did that for both my kids. One went a little crazy, and the other one is more reserved. Anybody who knows my kids will know which is which. Those are all really good points, Tam, and as advisors, we know that establishing healthy financial habits as early in life as possible is always a good thing.
This is probably a good time to shift our focus to how do I save enough to pay for undergraduate and perhaps some graduate school for my kids? Let me propose a scenario to kick this off. So I've saved into a 529 plan and my son has some money in a uniform transfers to minor account or an UTMA. What money should I use first to pay for school?
Tammy Pompei: Well, your child might wanna spend their money on something frivolous, but if you're a custodian of the UTMA account and would prefer to steer the funds toward education, then we would advise you to use this account first. The main reason for using the child's UTMA first is because to FAFSA, an UTMA is considered an asset of the child, so therefore this will decrease availability of financial aid more quickly than, say, an asset of the parent or of the grandparent.
If the child is not ready to use these funds, the funds can actually be moved to a 529 plan. It may also be savvy to liquidate the UTMA before the student's first year of college because cashing it in will likely generate capital gains as income for the child, and you may wanna do this at least three years before college, you know, is in the forecast.
Amy Braun-Bostich: Great. Okay, well if you do put an UTMA into a 529 plan, I believe, then you can't change the beneficiary of that 529 to another child, because you're using that child's money. So that is, you know, that's something that I think people should consider before doing that. So, are there any assets that don't count against financial aid?
Tammy Pompei: Yeah, actually some assets that don't count against the aid are qualified retirement plans such as 401ks, IRAs, SEPs, Simple Roth IRAs, profit sharing plans, and even some qualified annuities. Your primary residents are excluded, and small businesses are too, along with personal properties such as jewelry and artwork.
And you can even shift reportable assets into non-reportable assets. Or you can reduce these reportable assets by using them to pay down some of your debt. There's also the possibility of transferring assets into the parent's name instead of the child's name because the student's assets increase the expected family contribution, the EFT, at a higher rate than the parents' assets do.
Amy Braun-Bostich: Okay. Well that's good to know. So what are some differences between an UTMA and a 529 plan?
Tammy Pompei: Oh, sure. Good question. An UTMA is a custodial brokerage account opened by an adult on a child's behalf. The funds are diversely invested as agreed upon by the owner of the account and their investment manager.
They're held by the adult and usually transferred to the child once they turn 18, 21, 25, depending on the age of majority in the state. Upon opening the account, you can set that age of termination for the account. You can use the funds in an UTMA on anything, cars, airplane, tickets, computers, basically, as long as they benefit the child.
One downside of an UTMA would be that the earnings and the gains are taxed to the minor and subject to kiddie tax. The student will gain ownership of the account once they've reached a certain age.
Amy Braun-Bostich: And I think that kiddie tax can go up until age 26 if you're in school. So that's also a little bit tricky…
Tammy Pompei: …that's a nice added note. So, now let's move to the 529 plan. Some states offer state tax benefits when the funds are contributed to the plan. You know, when you put money into the plan. The earnings and the withdrawals are completely tax free when you use the money for qualified expenses like college tuition and other supplies.
Also for other types of education like technical school, cosmetology, electrician, computer programming, things like that. The funds in a 529 plan can be used toward regular education such as kindergarten through 12 year tuition and the accounts owned by a dependent student are treated as assets, as parent assets and not considered income when withdrawn for college expenses.
Now, there is a downside to the 529 plans. The earnings are subject to income tax and a 10% penalty if the withdrawal is not used toward qualified education expense. And sometimes, most times the investment strategies are limited inside of the plan too.
Amy Braun-Bostich: Yeah, I think I was reading too, that if a child becomes disabled, that those plans can be converted to an able plan, which is for you know, a sort of a trust for disabled children.
And then I also read, like in committee, they're working on getting the excess money in a 529. available for Roth conversion to the beneficiary. So that would be really interesting. I'm sure it would cause a lot of parents with money to overfund those 529s. I don't know if that'll happen or not, but that's some of the things that I've been reading.
So what type of expense is qualified for tax free withdrawals?
Tammy Pompei: Anything from tuition, books for class, supplies, equipment, including a computer or laptop, and room and board. This goes for at least halftime students. However, expenses must be paid to an eligible post-secondary educational institution.
Generally, an institution is eligible if they are already qualified to participate in the federal student aid programs.
Amy Braun-Bostich: Okay, so here's a question we always get. Should I withdraw funds from an IRA, a Roth IRA to pay for my child's college expenses?
Tammy Pompei: Probably not. You don't really wanna jeopardize your own retirement plan, and even if you do take funds from a traditional IRA, If you are able to avoid the early distribution penalty, the funds withdrawn will typically be counted as part of your taxable income anyway.
So there are smarter ways to pay for college. And remember this, your kids can always take a loan out for college, but you can't really borrow for your retirement.
Amy Braun-Bostich: Many have tried though. Many have tried. Well that's a takeaway for the day, isn't it? Can you explain prior, prior year reporting?
Tammy Pompei: Sure prior, prior year reporting allows students and their families to use tax info from two years prior when you're filing for the FAFSA.
So basically, if a student is starting school in 2022, they could file the FAFSA using information from their 2020 return. This also permits the student to apply for financial aid in the fall, I think it’s as early as October instead of waiting until January.
Amy Braun-Bostich: Oh, good. So if a 529 distribution is made in the junior year, it won't offset aid then.
Tammy Pompei: Right. And actually when the 529 plan is owned by the student or the custodial parent, it has little to no effect on financial aid ability and neither do the withdrawals coming from those accounts. But let's say if a grandparent or other relative owns a 529, withdrawals are included as un-taxable income to the student.
So it's best practices to use the accounts of the grandparents or some other non-relative the last two years of schooling because of the prior, prior year reporting method.
Amy Braun-Bostich: Okay. Good to know. Okay, so let's move to loans now. What are the major differences between government and private college loans?
Tammy Pompei: Okay, so federal loans are funded by the government and do not require repayment until six months after the student graduates or leaves college. They offer a fixed interest rate and a variety of repayment options. Meanwhile, private student loans are offered through private lenders and sometimes require payments while the students are still in school.
But other times repayment can be deferred until, you know, a period after they’ve either graduated or left school. These typically have fixed interest rates that are much lower than a normal private loan.
Amy Braun-Bostich: Okay. What about those income based loans? How do they work?
Tammy Pompei: So, the government typically defaults every borrower to the standard repayment plan.
It's a 10 year program of fixed monthly payments, but not every student or recent graduate has a salary that permits this plan or that allows them to pay a higher percentage of their income. So there's also income based repayment plans that are obviously based on your income level. This gives a promise of forgiveness if you make on time payments for 20 years.
So after 20 years, if you haven't missed one payment every month, the remaining balance of your loan is discharged basically, and I think it's important to note that these payments are re-evaluated every year in case their income fluctuates at all. Also, you know, you're making more money and you're able to pay more or higher per month or per year.
You can switch plans, so you can pay it off sooner than 20 years.
Amy Braun-Bostich: Gotcha. It's probably good to note that early on financial planning would include strategies that mitigate the need to take loans and may financially strap your child in the future. So with that said, let's take a look at tips to help students, help the family save for college.
Tammy Pompei: Yeah, absolutely. I think the largest thing is, and most people know this, is to apply for scholarships and don't get discouraged. I know that full-ride scholarships get all of the attention, but lower value scholarships can add up too. Your child or the student can work during summers even while they're in later years of high school or while they're still, while they're already in college.
Every little bit counts, and I also think that if it's manageable, they can find a small part-time job during the semesters too. Another option might be to either get AP credits in high school, or if there's a community college in your area, a student could dual enroll while they're still in high school.
I think that it's important to note that the path for post-secondary education looks different for each family, but the one thing that is constant is it's never too early to start saving for college.
Amy Braun-Bostich: Isn't that the truth? Well, according to the White House, now, up to 43 million federal loan borrowers will qualify to have debt forgiven, and 20 million will have their student debt eliminated entirely.
So, this is relatively new. Can you tell us a little bit more about this, such as who qualifies and how much debt will be forgiven?
Tammy Pompei: Yeah. And this is great news. It's something that's kept borrowers on their toes for a few years now, probably since the beginning of the pandemic. So single filer borrowers who earn less than $125,000 annually will qualify for either $10,000 or $20,000 in forgiveness. The income threshold is just doubled for couples who file jointly. So if you were a recipient of the Pell Grant, which is a major federal grant for low and middle income individuals, you will have $20,000 in college loans discharged.
And surprisingly, this represents about 60% of borrowers. Wow… I know. It's important to note that the students did not have to receive the Pell Grant every year. Receiving just one Pell Grant, either full or partial, will qualify you for the highest loan forgiveness amount, and borrowers who never receive the Pell Grant, they'll stick with the $10,000 in forgiveness.
Amy Braun-Bostich: Yeah, this is really great news, but it's not without controversy, which seems… people seem to have a little bit of a problem with it. But what happens if your student loan balance is lower than those $10,000 or $20,000 amounts? Can you still receive the funds?
Tammy Pompei: Unfortunately, no. For example, if a previous Pell Grant recipient still owes $14,000 in student loans, that is the amount they will get. They can't really cash in that extra $6,000 dollars.
Amy Braun-Bostich: But they, if they have a $6,000 balance, they can, they'll still pay off the 6,000, right? Oh, right. Yeah, yeah. Okay. What if you're a dependent student?
Tammy Pompei: The same income limits are true. It's just based on parental income.
Amy Braun-Bostich: Okay. What period of time are the loans available for forgiveness?
Tammy Pompei: Any federal student loans are eligible as long as they were taken out no later than June 30th, 2022, this year.
Amy Braun-Bostich: Okay. Well, more specifically, what loans are eligible, and which are ineligible for forgiveness?
Tammy Pompei: Oh, good question here, because this can be a little bit confusing.
Any federal direct loan is eligible, so there are four types. They are direct-subsidized and unsubsidized, direct graduate plus loans, direct parent plus loans and direct consolidation loans. The Federal Family Education Loan is also eligible. The Federal Government must have held the debt, so if those types of loans were held commercially, it won't qualify for forgiveness.
And you can find out if your loans qualify by visiting www.studentaid.gov.
Amy Braun-Bostich: Oh, great. Can borrowers receive additional forgiveness if they hold two different types of loans? For example, if a parent has a direct loan for themselves and a parent, plus for a child.
Tammy Pompei: Nope. No matter how many types of loans were taken out, there will be only one payment for either 10,000 or 20,000 or less if the balance is lower.
Amy Braun-Bostich: Okay, and then private loan debt is not eligible for forgiveness.
Tammy Pompei: It's not eligible.
Amy Braun-Bostich: Okay? What about federal student loan debt that was refinanced into private college loans?
Tammy Pompei: These borrowers are out of luck too. Students who usually refinance do so to reduce the payments, but this also means they've given up the federal protections.
Private loans for borrowers with high credit scores can sometimes offer lower interest rates than federal loans.
Amy Braun-Bostich: Okay. Well, I'm sure they're upset about that. Do borrowers who made loan payments during the pause period have any recourse If they qualify for forgiveness, and can they get a refund for what they've paid through that time?
Tammy Pompei: Actually, yes, they can. They can contact their loan servicer and request a refund. This is allowed because of the CARES Act that initially put a pause on repayments beginning in March of 2020. If you're a borrower, you should provide proof of the payments made during the pause and then request a refund from your servicer.
Amy Braun-Bostich: So do borrowers have to apply for loan forgiveness?
Tammy Pompei: Yep. The application, they're saying it will be available in October, but you should apply as soon as you can. So the forgiveness can hopefully take place before the pause ends on January 1st. The Biden administration says the forgiveness should be reflected in the borrower's balance about six weeks after submission.
What you can do now is just make sure that your servicer has all of your updated contact information, and once you see that your portion has been forgiven, maybe just save or print the statement in case something glitches later on. And actually, around 8 million borrowers might already be eligible for relief without even submitting an application just because they're relevant income data. It's already available in the federal system.
Amy Braun-Bostich: Oh, okay. Will taxes be owed on that forgiven amount?
Tammy Pompei: Nope. Thanks to the American Rescue Plan passed by Congress last year. Student loan forgiveness will not be subject to federal taxes through 2025, but it's important to note that right now 13 states have the potential to tax forgiven debt on the state level.
Although that number might be declining, and PA is one of those states. As of now, of course they are.
Amy Braun-Bostich: So where can borrowers find the latest information regarding this evolving initiative?
Tammy Pompei: Oh, sure. They can sign up for emails with the Department of Education.
Amy Braun-Bostich: Well, is loan forgiveness a sure thing?
Tammy Pompei: Well, it's expected that loan forgiveness program will be challenged in court.
The Biden administration said it was using its executive authority permitted under the Heroes Act passed after 911. This act allows for expanded presidential powers during a national emergency, and I would also just like to warn borrowers of scammers. Don't give out any personal information to individuals who say they're a loan servicer. You should always log into your loan service portal just to verify any communications.
Amy Braun-Bostich: So, excellent takeaway tips, Tam. Clearly planning for funding a college education takes some discipline on the part of the student and family, and we know from experience that families that commit to early on financial planning that includes a means to fund their education will be glad that they did.
I just wanna thank you so much for joining me today. I'm certain this has been incredibly informative for our listeners.
Tammy Pompei: Oh, my pleasure, Amy. It was really great to be here.