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WESTERN CPE BLOG

Providing the latest tax news, information, and updates for tax and finance professionals

Five Tips for Guiding Parents through Financial Planning for College

As financial planning professionals, you often encounter parents who are overwhelmed by the prospect of saving for their children’s college education. That’s where you come in. Your role as a financial planner puts you in a position to ensure the continued development of a child’s education, helping those that go to college reach their goal of earning a degree. Your work has lasting generational benefits, but with college costs continuing to rise significantly year over year, families need your expert guidance to develop effective saving and funding strategies that foster their children’s educational future. Here are five essential tips to help you guide parents through financial planning for college.

Start with Tax-Advantaged Savings Vehicles

We all know that saving for college early is the most ideal way to prepare for costs in the future. That’s why a 529 College Savings Plan should be your go-to recommendation for most families. These state-sponsored plans offer significant advantages: contributions may be state tax-deductible, earnings grow tax-deferred, and withdrawals for qualified education expenses are tax-free in some states. Parents need to understand that early investment in these plans can make a substantial difference through compound growth. A 529 plan can be used on qualified education expenses helping to cover tuition, fees, books, supplies, equipment, and certain room and board expenses. Be sure to check 529 plans by state as the plans do vary.

For eligible families, also discuss Coverdell Education Savings Accounts (ESAs) as a supplementary option, though the $2,000 annual contribution limit makes these more suitable as a complementary savings vehicle.

Maximize Education Tax Credits

Lets say that the student is in college already. What options can you give for financial planning for college if the student is has already enrolled in college? Look to educational tax credits, particularly the American Opportunity Credit and Lifetime Learning Credit. The American Opportunity Credit offers up to $2,500 per eligible student for the first four years of undergraduate education. The credit is calculated as 100% of the first $2,000 in qualified education expenses plus 25% of the next $2,000. Importantly, 40% of this credit may be refundable (up to $1000).

The Lifetime Learning Credit (LLC) provides up to $2,000 per tax return and is available for all years of postsecondary education. Claiming this credit relies on three important criteria:

  1. Someone (you, your dependent, or another person) pays qualified higher education expenses.
  2. These expenses are for an eligible student at an eligible school.
  3. The student must be you, your spouse, or your dependent claimed on your tax return.

Your client can claim the LLC when qualified education expenses are paid for themselves, their spouse, or their dependent. Clients cannot claim the credit if their modified adjusted gross income (MAGI) exceeds the annual threshold, which is subject to change. For tax year 2024, the amount of your LLC is gradually reduced if your MAGI is between $80,000 and $90,000, or $160,000 and $180,000 if you file a joint return. You can’t claim the credit at all if your MAGI is $90,000 or more (or $180,000 or more if you file a joint return).

Structure Loan and Interest Deduction Strategies

While student loans shouldn’t be the first option, they’re often part of the college funding equation. Finding the best option for your client is crucial when thinking about incorporating loans into their college financial planning strategy. For instance, while it can be taxing to take out a loan, make sure parents understand that a student loan interest deduction of up to $2,500 is available for eligible borrowers—though it phases out for higher-income earners, so you’ll want to check the IRS or the Federal Tax Update for updated income limits. Develop a balanced financial approach with parents that doesn’t compromise their retirement savings, and explain how recent changes allow 529 plan funds to be used for student loan repayment. Not all loans are created equally, so discuss the differences between federal direct student loans, federal parent PLUS loans, and private student loans to help families make informed borrowing decisions. Navigating college debt doesn’t have to be worrisome for clients when they have your expertise to rely on. Your knowledge will go a long way in bringing clients peace of mind

Create Clear Contribution Guidelines

Helping parents to establish realistic savings targets based on their goals and resources is an essential part of college financial planning. Work with them to determine what percentage of college costs they can reasonably cover while maintaining their other financial priorities. Consider suggesting a balanced approach to financial planning for college: some expenses covered through advance savings, some through current income during college years, and some through future income via loans. Emphasize the importance of starting early to maximize the benefits of compound growth in tax-advantaged accounts.

Implement a Comprehensive Education Funding Strategy

It’s not uncommon for parents to sacrifice for the needs of their children, often dipping into savings and/or retirement funds to give their children a better future. As the parent’s financial planner, you can develop strategies that balance college savings, while mitigating the client’s instinct to dip into that retirement fund. There are no loans for retirement. Show them how to leverage all available resources, including need-based financial aid, merit scholarships, and family contributions. Discuss the benefits of prepaid tuition plans for risk-averse clients who want to lock in current tuition rates, particularly if they’re confident their child will attend an in-state public university.

Conclusion

Remember that your role extends beyond simply providing technical advice about savings vehicles and tax benefits. You’re helping parents navigate a critical financial challenge while ensuring their own financial security isn’t compromised. Not to mention, you’re playing an instrumental role in a child’s educational future. By implementing these strategies thoughtfully and systematically, you can help your clients develop realistic plans that balance their desires to provide educational opportunities for their children with their broader financial goals. College financial planning is an investment in the future of a family’s success, and you can be a guiding force that makes a family’s college dreams possible.

Interested in learning more about college financial planning and education tax benefits? We’ve got you covered with Education Tax Guide, Education Tax Benefits, and Personal Finance Planning for Accountants.