Paying for college is a top financial concern for many families. In 2015 a Gallup poll found for the first time that parents identified paying for college as their primary financial concern. ¹ It showed that 73% of families with children under 18 worried about paying for college. Concern over college costs has continued as parents also report higher levels of concern over paying for college since the COVID pandemic. ² It’s easy to understand why parents are concerned. Data shows that college costs are up 33% since 2000. ³ New changes to Colorado and US laws could make it harder for families to pay for college.

For years taxpayers in Colorado have enjoyed one of the nation’s most generous college saving tax benefits. Colorado allowed taxpayers to deduct 100% of their contributions to the State’s 529 program, CollegeInvest, against their taxable state income. ⁴ Most amazingly this deduction was not capped or limited by the taxpayers income. Almost all of the states that offer a tax deduction for college savings cap the amount that can be deducted against taxable state income or limit the deduction based on income. ⁵ Colorado was the only state to offer a deduction for 100% of contributions without a cap or limit. ⁶ This generous tax benefits has come to an end. On June 23, 2021 Colorado Governor Polis signed HB21-1311. ⁷ One key feature of this bill is to limit the tax deduction for contributions to 529 plans to a maximum of $15,000 per taxpayer and per beneficiary beginning in 2022. ⁸ This change limits the tax savings available to Colorado taxpayers when making contributions over $15,000 to the state’s 529 plan.

One option for Colorado taxpayers is to make a larger contributions to the CollegeInvest 529 plan in 2021. This is called “superfunding” and allows taxpayers to make a larger gift and deduct it against their state income tax before the new law takes affect. The state plan allows taxpayers to make five years of contributions in a single calendar year and contribute up to $150,000 in one year. ⁹ This is called a 5-year election. By making a larger contribution in 2021 taxpayers could benefit from the current, unlimited deduction before the law changes.

At the national level changes are coming for parents with multiple children that will likely make it harder to pay for college. The COVID relief legislation signed by President Trump in December 2021 included a significant change to how financial aid is calculated and distributed for parents with multiple children in college. ¹⁰ The provision, titled the FAFSA (Free Application for Federal Student Aid) Simplification Act, changes how financial aid is calculated for the 2022-2023 academic year. Parents with high school Sophomores and younger will be affected. Currently, the FAFSA calculation recognizes when a family has multiple children in school at the same time and reduces the family’s expected financial contribution (EFC) for each child accordingly. ¹¹ For example, if the FAFSA application calculates a family’s financial contribution to be $60,000 for one student it would divide this amount to $30,000 for two students in college at the same time. The COVID relief bill eliminated this adjustment. The FAFSA will now assume the same family contribution for each student with no offset for families with multiple children in college at the same time. In the example above the expected family contribution would be $60,000 for each of the two children. The effect will be to drastically reduce the amount of need-based financial aid that families with multiple children in college may receive.

Despite these headwinds there are multiple strategies families can use to pay for college to help avoid excessive student loans:

1. Shifting your strategy to Merit-Aid: there are many strategies advertised to help families get more financial aid by trying to change the information the family reports on the FAFSA and the underlying calculations. Some of these tactics, such as shifting assets or under-reporting income, are illegal while others involve buying financial instruments such as life insurance or annuities that may have high expenses. ¹² But the FAFSA formula is more focused on income than assets and families often have little ability to change their income legally in the year before their child goes to college. Rather than focus on need-based aid we recommend families with high incomes focus on merit-aid. Many private and out-of-state colleges now offer attractive merit-based packages for students that fit their profile targets. Families can increase their chances of receiving merit-based aid by encouraging their student to pursue activities and hobbies they are passionate about, encouraging them to take advanced and honor classes, use test prep services to study for the SAT or ACT, and forging genuine connections with the enrollment office of the school.

2. Focus on Academic, Social and Financial fit: Large, name-brand schools (both public and private) have tens of thousands of students applying to them and can be picky with admissions and merit aid. Families can do better by focusing on a fit for their student based on academics, social needs, and the financial ability of the family rather than a name brand. Parents can help guide their students to a school that matches them academically and socially and avoid focusing on a school’s name recognition. Parents can also provide clear guidelines on how much they can contribute and encourage students to filter out schools that cost too much. We recommend that parents work with their teens to filter schools on a net cost basis. This approach takes the school’s published costs and applies average aid awards to help parents get an estimate of their likely costs. Of course, each aid offer is unique to the student. But many second tier schools offer an excellent education, social setting, and attractive merit-aid packages that can significantly reduce the costs of college.

3. Stress the Importance of Graduating on Time: The maxim that the most expensive education is the one that isn’t finished is really true. It is estimated that average cost of a transfer to a state school costs $14,000. ¹³ Parents can let their children know that graduating in four years is the clear goal and that unplanned transfers can be costly.

4. Attend a Community College and Transfer to a State College: Many highly respected State Universities have agreements with in-state Community or Junior colleges to automatically accept pre-requisite classes for students who are accepted. According to the College Board the average net annual cost to attend a public two-year university (as defined by tuition and room and board after average aid) was $8,860 vs $14,850 for a public four-year college for the 2020-2021 school year. ¹⁴ By attending a community college for two years a student could reduce the total cost from $59,400 to $47,420, a reduction of 20%. If a student lived at home for two years they could reduce the total cost from $59,400 to $37,240, a reduction of 37%.

5. Invite Grandparents to Help: Many Grandparents are interested in helping to pay for their grandchildren’s college. Parents can open a dialogue by mentioning their college planning and letting Grandparents know that under the current rules gifts from a Grandparent directly to a grandchild or from a Grandparent-owed 529 plan can be considered income and negatively affect the Grandchild’s eligibility for financial aid. This negative effect will be removed in 2022 thanks to the FAFSA Simplification Act. In the meantime Grandparents can make contributions to a 529 owned by the Parents or wait until the 2022-2023 academic year to make gifts.

Even though college costs have been rising rapidly over the past twenty years parents can take steps to benefit from current tax deductions such as the Colorado state income tax deduction, plan for changes to FAFSA, and work proactively to help chart a path through college that avoids excessive debt.

Are you concerned about paying for college? Contact Summit Hill Wealth Management at 720-759-4949 or info@summithillwealth.com for a complimentary consultation to understand how we help clients achieve their financial goals such as paying for college.

All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Opinions expressed herein are solely those of Summit Hill Wealth Management, LLC and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered by Summit Hill Wealth Management, LLC a Registered Investment Advisor in the State of Colorado.