23 Jul We have some college savings. In what order should we use them?

Q. My daughter will be a college sophomore at a college that costs $60,000 a year. She took the federal loans of $5,500 last year and she will take them again. We have $35,000 in a cash fund and $100,000 in a 529 plan. How should we plan to pay for tuition next year? We will run short by the end, but we will figure something out.
— Parent

A. College costs are not easy to manage.

You’re in a similar situation to many parents these days. You’ve saved for college but don’t have enough to cover the high cost of attendance.

Taking into account the numbers you provided, you have a gap of $23,000 that you’ll need to cover, said Jeanne Kane, a certified financial planner with OneDigital in Boonton.

Let’s go over the numbers. It will cost $180,000 for three more years of attendance. Then subtract the $100,000 529 plan, the $35,000 cash fund and the $22,000 in student loans, leaving the $23,000 gap.

Kane noted your daughter has some skin in the game with her student loans.

“It can help give students a reality check and motivate them to do well in school,” she said. “Better grades will likely give her access to better and higher paying job opportunities.”

She said you should look to spend down the 529 first and then use the cash fund, so if you need to take out loans to cover the $23,000 gap, you won’t be accruing and potentially deferring interest while your daughter is still in college, Kane said.

You’ll also know how much money you’ll need to take out, she said. If you take out loans too soon, you could miscalculate and take out too much.

“Use 529 plan funds for qualified educational expenses to avoid income tax and a 10% penalty,” she said, noting the timing of the distributions is important.

“You should plan to take 529 distributions in the same calendar year you paid the qualified expenses,” she said. “If the timing doesn’t line up, you could pay ordinary income taxes on the distribution and a 10% penalty.”

You didn’t mention your income level, but you should see if you qualify for the American Opportunity Tax Credit (AOTC), Kane said.

“It offers an annual tax credit of up to $2,500 based on qualified tuition, school fees, and course material expenses,” she said, noting that expenses paid with 529 funds don’t qualify, and room and board, medical, transportation and insurance expenses don’t qualify.

There are income limits.

Singles get the full credit if income is $80,000 or less, and married couples who file jointly get the full credit if they earn $160,000 or less. If your income is higher, you get a partial credit, but if you earn more than $90,000 as a single or more than $180,000 as a married couple, you no longer qualify.

“If your income qualifies, use your cash fund to pay for these expenses up to the limit. Then use your 529,” she said.

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This story was originally published in July 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.