Preparing for College Education: Making Sense of Student Loans, 529 Accounts and FAFSA with Mark Kenney – Ep 069

[INTERVIEW]

Matthew Peck: Welcome, everyone, to another edition of SHP Financial’s Retirement Roadmap podcast. I’m your host today, Matthew Peck. Thank you so much for lending us your ears as we dig into a very important topic that you either are painfully aware of or hear about and that is student loans, college tuition, FAFSA, 529s, Pell Grants. I mean, it goes on and on in regards to this landscape of college planning, college funding, loan forgiveness, everything that you hear about. And here at SHP, we want to make sure that people are living their lives not worrying and wondering. And there’s a lot of worrying and wondering about college planning.

And so, the goal today is that we want to make sure that all of our listeners are better equipped to handle this landscape, to know what to do either for their kids or for their grandkids, and to truly help out the family in a multigenerational format. Who better to discuss college planning than our own CFP-certified financial planner, certified tax specialist, and recurring guest on this podcast? And that’s Mark Kenney.

Mark Kenney: Thanks for having me. I think it’s a great topic to talk about and very relevant in today’s news. So, I look forward to educating our client base.

Matthew Peck: Well, especially too, I mean, I have four children so I know I’m listening and we’re listening to everything that you say. So, I’m not sure if you want to start with the current events. I mean, I think people hear about the issues FAFSA has been having. The loan forgiveness has been a political football now since Biden was elected. First, he said, “We’re going to forgive loans,” and it was struck down as unconstitutional, etc… Or do we just want to start at the beginning in the sense of, alright, here are some important terms to understand when it comes to college planning?

Mark Kenney: So, this is a relevant topic because statistics say there’s $1.75 trillion in total student loan debt out there. So, it’s a talking point politically and it’s something that everyone’s wondering and worrying about, unfortunately, because 42 million Americans, which is, what, 15% of the population have some sort of student loan debt. And actually, the average borrower owes $37,000. And believe it or not, Matt, when you look at the cohorts of the percentage of people, it’s actually people age 62 or older that actually have most of the student loan debt. Now, why I say that is there’s more younger borrowers, but by 62, it’s something like 20% of 62-year-olds have some sort of student loan debt, which is probably actually their child’s or grandchild’s debt.

Matthew Peck: Well, that’s what I want to ask about. Do we know how they got there? I mean, was that old loans that they were never able to pay off? Or do we think it was more these were cosigned loans and these sort of just accumulate with them trying to help out their kids?

Mark Kenney: I think that’s a great question. I think you get to start at the starting point of when someone decides to go to college, they have to apply for the FAFSA, okay?

Matthew Peck: Everyone applies for FAFSA or no?

Mark Kenney: You should. Although we might not get approved for that. It kind of starts with the FAFSA, decide how much you or the student is going to pay. All right. And that usually starts every year in December for the next calendar school year. And it’s done through the government website, which is StudentAid.com. And that determines your eligibility for financial aid. Now, you have to understand what is the FAFSA looking at. They’re looking at income and they’re actually looking at income two years prior. All right.

Matthew Peck: And this is, sorry to interrupt, this is a federal program. So, FAFSA is, so I think I wrote down in my notes, so it’s a Free Application for Federal Student Aid.

Mark Kenney: That’s correct.

Matthew Peck: So, it’s a government program. And maybe that’s probably why it got kind of buggy and clunky recently. I saw that in the news.

Mark Kenney: Yeah. So, they actually changed the way the FAFSA looks at income. There was a lot of bugs that went into the system. There was a lot of complaints that applications weren’t getting filed on time, that birthdays were incorrect, and the whole system got backed up, making it even more frustrating for parents and students. I have read that they’ve kind of fixed the bugs and it’s hopefully cleaner this time around, which starts in December of 2024.

Matthew Peck: Okay. So, two things there. A, why December? So, tell me, is that for loans for then the following spring? And then the second question is, and you were about to go there, which was, okay, what does FAFSA look at?

Mark Kenney: Yeah. So, yeah, it starts in December, although that’s not the deadline. That’s actually the earliest window that opens up.

Matthew Peck: So, it begins in December. Okay.

Mark Kenney: Begins in December for the following year. Okay. Most likely those are people who are going to apply for the fall semester. So, if your child is going to graduate in May or June, the window opens up this December so that you can start the application process of determining your eligibility. Now, you asked a great question. What does FASFA look at? It is going to look at income from the parents and assets. Remember, this is a formula that’s trying to gauge your ability to pay for your child. So, what they do is they look at your W-2s, they look at your tax returns, and it’s actually from two years prior. So, it’s almost like what Social Security does.

Matthew Peck: Oh, for the Medicare.

Mark Kenney: For the Medicare. They look two years back.

Matthew Peck: Okay. Two years previous.

Mark Kenney: I think they think maybe you can manipulate your income the year before so they look two years back. So, they’re obviously going to look at the income of the parents and then they’re also going to ask about assets like what do you have? And I think it’s important to differentiate between what is countable and what is non-countable. And I’ll go through there. So, obviously, any liquid assets, checkings, savings accounts, you have a stock account that’s non-qualified, a brokerage account, real estate investments, college savings accounts, trust funds, those are all counted. And I will put a little caveat with 529 accounts. I find that it is a misbelief that parents or grandparents think that, “If my child has a 529 account, they are less likely to get financial aid.” It’s just not true.

In fact, the FAFSA has actually incentivized individuals to save for their child’s education by putting the weighting of 529s less than these other assets. So, what I mean by that is to put that in context, if you have a UTMA account, which we know is a minor account, you open it, you fund it with a few thousand dollars every year, but it’s held for the benefit of the child. That is weighted at 20%, meaning that if there’s $100,000 in that account. Roughly 20,000 of that is expected to go to the child’s education because technically, a UTMA account, it has a custodian but it’s for the benefit of the child. The 529, it was at 5%. I believe they even lessened the impact to there. So, they’re going to ask about it but it’s not something that’s going to weigh heavily towards their financial aid.

And I think a good point for our clients and listeners to hear is that actually 529s that are owned by the grandparent, the aunt, or uncle are not reported. So, my parents, if they have a 529 for my children, when I apply for the FAFSA, that will not be counted because it’s not considered my asset or my child’s assets. And then other non-reportable assets, the qualified retirement plans. So, if you’ve done a good job saving in a 401(k), that is not countable. Your family home is not countable, personal possessions, and lastly, life insurance. Even the cash value of indexed universal life is not countable on the FAFSA’s form.

Matthew Peck: So, alright, I want to go back to the 529s and unpack how they’re weighted against you because there’s definitely confusion there. I personally have it myself. So, okay, 529, it’s in the kid’s name is counted but almost weighted, it’s weighted less like, yes, it shows up on the application but they kind of like almost graded on a curve. They say, “Yes, it’s there, but we’re not going to really hold it all against you.”

Mark Kenney: Yeah, that’s correct. So, it used to be called the Expected Family Contribution. What the family was expected to contribute to the child’s education was by a formula that looked at the income and the assets. They’ve since changed the terminology to Student Aid Index. So, where accounts that are held in the child’s name, like UTMA accounts, private bank accounts that they may have is weighted at 20%. The 529 is weighted at 5%, meaning that using that same $100,000, if you had $100,000 in a UTMA account, $20,000 of that is expected to go to their education. Where $5,000 of the 529 is expected to go if it’s held in the child’s name or they’re the beneficiary of the 529 account.

Matthew Peck: That’s interesting. And for all of our listeners, I kind of almost translate it in my mind about almost like weighted averages for grades, right? I was at my kid’s student house or open house, and they’re talking about, okay, tests are weighted at 50% of your grade and homework is weighted at 15% of your grade and 35% are quizzes or whatever that may be, or projects. And so, for all of our listeners, imagine you go to this FAFSA application and then it sort of just enters this formula to say, “Okay. We’re going to add more weight to that particular asset and less weight to this particular asset,” or whatever that may be. And then to clarify one last point, if the 529s are not at all, if the grandparent or aunt or uncle or somebody else owns it, it’s not even in this weighted average.

Mark Kenney: That’s correct. Yes. That was a change. So, I think the point is, yes, understanding how they come up with this Student Aid Index or formerly Expected Family Contribution and little things that you could do to maybe increase your chances of getting financial aid, like having a grandparent own the 529 account or as the custodian of that account.

Matthew Peck: So, let me ask, and is now a good time to talk about cosigning loans? I hear often about cosigning loans. Or should we continue with the public loans and cosigning is only really private? Because I do want to talk a little bit about private loans.

Mark Kenney: Yeah. So, great question. So, that’s the first step, right, is filling out this FAFSA. The next step is the student can get loans on their own without any cosign. Those are called Stafford loans.

Matthew Peck: But they still have to go through FAFSA? So, they still have to develop their index over to…?

Mark Kenney: Correct. So, then what happens is on the FAFSA, I think you’re allowed to put ten different schools on there. And then depending on the cost of the school, those results will be sent to the school, which determines how much the child or parents have to pay. Okay. And the first step is for the student to get loans in their own name. These are called Stafford loans, okay, and they’re subsidized and unsubsidized. And that really just determines the amount that the student can get. Now, you’ll see my notes here that really because the student doesn’t have any income or substantial assets, the Stafford loans are only going to solve maybe a year’s worth of tuition. And that’s where your point comes in is that that’s where it goes to Parent Plus loans, right?

We hear this term Parent Plus Loans. And what these are, these are loans, federal loans where the parents is the cosigner on these loans to come up with the cost of the tuition or room and board above and beyond the Stafford loans. Now, just like any other loan, the eligibility of someone’s credit and their income for the parents is going to determine how much they get for Parent Plus loans.

Matthew Peck: How much they get or how much interest they pay? Because if they have low credit or bad credit and low income, they might be 12%, or are all these standardized?

Mark Kenney: Yeah. Great question. Actually, the Parent Plus loan interest rate is set yearly. And although your eligibility is determined by the underwriting of you, the parent, whether you have good income or not, the interest rate is set at, actually, 9.08% this year is what parents who borrow money on Parent Plus loans are going to have to pay in interest on that note.

Matthew Peck: So, wait a sec. Okay. Need to pause here for a little bit on this one. Number one, all of these loans that we’re talking about, the first level is like the Pell Grant or Stafford, those are federal. So, you sort of start there and you get a little couple of chunks here and there.

Mark Kenney: Correct.

Matthew Peck: And then you realize that, okay. And what are those chunks? I mean, how much? I mean, you’re talking $10,000 or how much would they get to start on their own before we get to the Parent Plus?

Mark Kenney: Yeah. So, with Stafford loan, again, the loan won’t be for more than what the college costs, but we’re talking about 5,500 for a subsidized Stafford loan and up to $20,000 for a direct unsubsidized loan.

Matthew Peck: Okay. So, sorry to stop. So, the max we can get from this initial tranche, if you will, this initial amount of federal student loans is, call it, 20K?

Mark Kenney: Yes, that’s correct. Yep.

Matthew Peck: Okay. And then current cost of college right now?

Mark Kenney: Yeah. That’s what I was going to say. We were talking, I mean, depending on where you go, right? So, I do have some statistics on what the average cost of college. A public, this is just tuition now, okay, public school is $10,740 and a private school is $38,000. Now, that is just tuition. And as we know, that runs a gamut. Some local schools here, Boston College, Boston University are well above that. We’re talking 70 to $80,000 all in.

Matthew Peck: Per year?

Mark Kenney: Per year. Yeah. Unfortunately, that’s just the cost of college. We could have another podcast on where we think that will go, whether it’s worth it. But that’s technically… And that’s where the Parent Plus loans come in, Matt, because if a student can only get $20,000 and BC is going, “Well, we want $60,000,” that’s when mom and dad have to go get whether they, if they private pay, pay cash, but if they want to get a loan, that’s where the Parent Plus loans come in. And it’s important to know that they are on the hook. That’s why these are underwritten, meaning that they look at the parent’s income in order to provide this loan and that they’re signing up to pay these loans for 10 to 25, some were 30 years.

Matthew Peck: Okay. So, let me also, again, almost like do some quick math here, right? So, let’s say the max you get on this initial chunk is about 20K, give or take, which if we use BC’s tuition is one-eighth of the total tuition, right? So, it’d be like one-fourth times…

Mark Kenney: Not even.

Matthew Peck: No. One-sixteenths of the total tuition. And so, then, okay, if we’re going to make up that difference, then we move on to these Parent Plus loans.

Mark Kenney: That’s correct.

Matthew Peck: Is there maximums to that? Or that’s just more how much debt you want to take on?

Mark Kenney: No. So, again, the loan will not exceed the cost of the total cost of college. And actually, when these loans are delivered, I think it’s important to differentiate that the Parent Plus loan will actually pay the college directly so that you can’t run off and buy a Lamborghini on it. So, they will directly pay the cost of the tuition, and then any funds left over can go towards books, room and board, computers, anything like that. But that’s how they will determine how much you borrow and then you’re on the hook to make those payments.

Matthew Peck: And this is just tuition. So, if the room and board is double that, if tuitions let’s say 40K, and then room and board is another 40K, it’s only the $40,000 for tuition? Or does room and board get brought into the Parent Plus loans?

Mark Kenney: Yeah. You can borrow up for the room and board.

Matthew Peck: Okay. So, total cost.

Mark Kenney: You can borrow for the total cost of college. And let’s be honest, I mean, now with room and board, whether it’s on campus or off campus is almost the cost of tuition, right? I mean, if you’re going to Boston, you’re renting for that. So, yes, you can borrow that cost in the Parent Plus loan as well.

Matthew Peck: So, okay, parent now cosigns. They say, “Okay. I’m going to take out $60,000 a year or whatever it may be, call it, 250K, right? And hopefully, these numbers are okay. So, a Parent Plus loan is an automatic cosigned loan?

Mark Kenney: Yes. Has to be cosigned, hence the name Parent Plus loans. They have to be signed by the parents. Again, it’s a higher level of debt and we have clients that have Parent Plus loans. They could be in the 50s, 60s, 70s. Their child went to school and they’re in their 30s now and they still have these student loans to pay, which are quite substantial, depending on how much you borrowed.

Matthew Peck: And then when the student eventually graduates, is it a copayment? So, the students pay in half. He’s getting a bill for half and the parents getting billed for half?

Mark Kenney: That is a great question, Matt, and that is determined by the family. Okay. So, what I mean by that is just like any other debt, right, a mortgage, you could pay my mortgage and the bank doesn’t care and I’d be very thankful. But as far as student loans…

Matthew Peck: Anecdotally, you know.

Mark Kenney: As long as they’re getting paid, they don’t care. So, who makes that payment? Whether it’s the parent or whether it’s the student, as long as that payment is being made. However, the bill is going to come to the parents because they were the cosigner. And when they went through the underwriting process, they said, “We will make these payments back to you,” which can be a couple thousand dollars a month. I’ve seen those payments.

Matthew Peck: We said about 9% interest.

Mark Kenney: That’s correct.

Matthew Peck: These guys are charging that. All right. Before I get into other areas, tell us about, because I’m thinking about loans and Parent Plus loans then as we said at the very beginning, being in the news about loan forgiveness, I mean, is this what they’re talking about when they talk about loan forgiveness, Parent Plus loans, or no? Or is it a whole different world?

Mark Kenney: Yeah. So, great question. I mean, they’re talking about all student loans. As I said in the beginning, there’s $1.75 trillion in total debt. And I think we’re in a unique environment where COVID kind of changed everything. So, during COVID, they put forbearance or they put pauses on payments. But the interest was ticking and, obviously, we’ve seen interest rates rise, which is the cost of Parent Plus loans at 9%, right? We go back three years ago and there was mortgages at 2%. So, that whole interest rate environment has changed and increased the amount of debt out there. So, yes, we’ve seen these talking points of, because it’s the elephant in the room. How can students afford to buy a house or how can they get ahead when they’re saddled with this huge amount of debt? And these payments, because they are between 10 and 30 years payments, they’re almost like a mortgage.

Matthew Peck: But they’re set every year. So, it’s a 30-year payment, 30-year schedule so like a mortgage. However, that 9% that’s charged on the Parent Plus loan will vary. So, it’d be 9% this year, then 10% next year, then 7%. Or no?

Mark Kenney: It’s determined when you take out the loan. So, it is a mortgage.

Matthew Peck: It is a fixed term. It’s just at that 9%.

Mark Kenney: Unless we go down the realm of consolidation, which you can consolidate loans.

Matthew Peck: And so, that’s what I’m trying to… That’s why I’m glad you went there because that was going to be my next question was that the, I guess, I mean, trying to think, in general, is this how it goes? What I’m thinking is that, okay, you cosign alone, you take out, say, $200,000 or whatever that may be on behalf of your son or daughter. Son or daughter then graduates. Are we then looking to kind of transfer that burden onto them because now they have a good job and that’s what consolidation is or no?

Mark Kenney: So, there’s two types of consolidation. First, you can consolidate within the government loans, okay? If interest rates do drop, you can consolidate those loans. They may have Stafford loan. They may have a couple of Parent Plus loans. They can consolidate those to make one payment to these providers, right? So, we hear of Nelnet and these other providers. They’re just there to collect the money. What you’re talking about is if parents want to be free of that debt, right, which I can understand. Then you have to go to the private world, okay? And you have to look for private loans to pay this…

Matthew Peck: Pay the federal government.

Mark Kenney: That’s correct. Now, there’s some pros and cons to that. The pros for the parents are, you know, if the child has significant income or enough income to take on this debt themselves, then, yeah, you can go to Discover, SoFi, all these institutions that will say, “Yeah. You’re credit-worthy. We’ll pay them off and it’s now in the student’s name.” The downside is the unknown about forgiveness on the federal loans. Private loans aren’t going to be forgiving. SoFi may really like you as a customer. They’re not going to forgive your loan where the federal government may. This is, again, a talking point of $10,000 was going to be forgiven. And the second, and I think the morbid point that I’ll make, is that if the borrower does happen to pass away or the student, but forgive the morbidity of this, is that the loan is actually forgiven on the federal government side.

Matthew Peck: The Parent Plus loan?

Mark Kenney: That’s correct. Yeah. So, if you’re a parent and you signed a loan and you happen to pass away in your 60s, that debt for you and the student is forgiven on the Parent Plus loans or federal government loans. Again, on the private side, they’re going to come after your estate, but for the Parent Plus loans, they are forgiven if the student or borrower does pass away.

Matthew Peck: Which then, okay, and we were talking a little bit offline, Mark. So, what type of advice do you then give your clients that have these Parent Plus loans? I mean, do you then say, “Okay. Hey, why don’t you just pay a little bit of it and then pass away,” service the loan and then go ahead and enjoy that benefit? Or is it, “Look, hey, you’re paying 9%. Let’s pay this off as soon as possible”? I mean, how do you help your clients find that balance?

Mark Kenney: Yeah, I think that’s a great point. I think, again, it starts with the conversation of is the student able to help the child, able to help in some sort of way. You see it where we’ll sit down with clients in their most important job, their first financial goal is to pay off those loans. They want to pay all of it and that’s their goal. And then there are some who say, “Listen, I’m struggling as it is.” What I’ll say this is that as long as you make the minimum payments, just like a mortgage or a car loan, your credit’s going to stay intact and eventually that loan could be forgiven or released if you were to pass away. I think from a standpoint of when I discuss with a client, I’d rather them attack any private debt that they have, mortgages, car loans, credit card debt because that really isn’t forgiven, right?

And if you have $3,000 and you’re deciding whether to pay your mortgage or your Parent Plus loans, I’m probably going to direct you to pay your mortgage because that’s a place to live. But again, I think it goes back to the beginning of understand what you’re signing up for. Understand that you’re going to be on the hook for these payments for 30 years and it’s probably going to be in your 60s or 70s, your retirement years, because your children are 30 years younger than you and that loan’s on you.

Matthew Peck: And then making that decision, so let’s just say based on you go to the FAFSA program and the Parent Plus loan, they say, “Okay. You have and it’s going to cost you $80,000 a year,” or whatever that may be and so your max is $320,000, right? That’s whoa, okay. What advice do you give to parents? Do you say, “Okay, let’s try to loan or lend for the entire amount,” or do you want to say, “Okay, how about 25% we’ll pay with income, then 25% I’ll pay with this loan and 25% with savings”? I mean, I’m just trying to think out loud of, is there a formula that you like to recommend for how much debt should the client take on or how much of the nut should they cover through these FAFSA programs?

Mark Kenney: Yeah. There’s no right answer. Like financial planning topics, it’s an art more than a science. I think it really goes to their wishes. I think it goes to understanding what their income situation is, the parents, what their debt burden is. I have some clients that say, “Listen, I’ll give them $10,000 each and they have to take on the debt, the rest of it themselves.” I have some clients that pay cash every semester out of their savings or their brokerage accounts. I think it starts with a conversation but understanding the impacts of what their decision has is that this doesn’t go away. Even if there was student loan forgiveness, $10,000 with average balances of $40,000, $50,000, it’s going to save you some but it’s not going to wipe away the whole debt. So, I think it starts with having a conversation, putting in context how important it is for you, and then kind of goes to a deeper conversation of, “Is college worth it?”

Matthew Peck: Well, I was going to go into another area sort of a deeper conversation and that’s just more on that idea of legacy planning. And what I mean by that is I’m curious and I’ll see your opinion in a moment, but I was just having this conversation with a client where he was about to make a gift of a certain amount of dollars for his kids so they could put a down payment on the home. But it’s like, okay, well, if one son gets $50,000, we have to make sure the other sons get it or it’s equal out this distribution. And it’s kind of similar to tuition. I mean, imagine if one, if you have multiple kids, right? One child goes to a public school, one guy goes to BC. I mean, there might be this person paid $200,000 in tuition. This other person may have paid $400,000 in tuition. Do you ever see it they bleed into legacy planning or does that conversation come up when you do have, you know, when we are talking FAFSA?

Mark Kenney: Yeah. That comes up a lot. I mean, I’m a parent as well. You want to be fair, right? It’s like when you’re divvying up the M&Ms, my kids are going to count to make sure they are even. And I want to make sure that I carry that forward. Yeah, I think you got to balance it out. You don’t want to send one child to Boston College, the other one goes to UMass because he wants the money for something else, put towards a business or put towards a home. So, I think it is important to understand to even it out but you made a great point about legacy. I’ve had some clients that will say, “Listen, I put my kids through college, right? I pay $20,000, $30,000 a year. So, I’m okay if they don’t get $100,000 or $1 million from my IRA.” Some clients are different. They say, “I want to take out the minimum from my IRA because I want to leave a legacy.”

I think there’s something to be said about giving your kids the money while you’re living if you can accelerate their future instead of them getting some sort of money in 30 years. So, I think the great thing about us when we run those, “How much money will you have at 90-95?” if they see that they have this bucket of money and even in the worst market conditions, there’s going to be a nice legacy to be passed on, they can make more informed decision now, which is, “Maybe I do pay for their college education.” Because if they’re going to get it in 30 years, but we’re going to forego college now, can’t that set them up? Because we all know statistics say that you’re more likely to earn more money, although I think that’s another podcast, something to be said about going into the trades.

Matthew Peck: Yeah. We’ll come back to that question, yeah, that you had earlier.

Mark Kenney: But that allows them to make an informed decision. Instead of getting when they’re 95 and the child is 65 and all of a sudden, they didn’t go to college or the parents didn’t give them a gift to buy a home, what good is the money at 65 when you could have had it in your 20s and 30s and set you up for a better future?

Matthew Peck: Yeah, especially at that time and time value money when you receive the time versus the future. And last thing just to kind of bring it back into college planning, FAFSAs, and 529s, the FAFSA program that we’re talking about is for parents. Is that correct?

Mark Kenney: Yes. So, I mean, it’s for parents and students. You have to apply both.

Matthew Peck: Well, the reason why I was asking if it’s primarily parent-based, and some of our listeners are grandparents.

Mark Kenney: Yeah.

Matthew Peck: What recommendation would you give to them? Is it the 529 route or what? So, let’s say there’s a grandparent listening right now and say, “Okay. Well, my son and daughter have to navigate it for my grandkids. Here is how I would like to help,” or what ways can they help?

Mark Kenney: Okay. So, I’ll tell you the things that they shouldn’t do. Okay.

Matthew Peck: That’s a good start.

Mark Kenney: It is give money to the child outright. Okay. Do not give 20,000 to little Johnny so he can put it in a savings account because, again, we go back to the beginning is that is more heavily weighted. Grandparents have a unique situation where they can pay directly to the school if they want. Okay. They can actually use a 529 account. And in order to avoid the gifting limit, grandparents or actually anyone can give five years’ worth of gifting into a 529 in one lump sum. So, what I mean by that is that they want to really help out, right? So, $18,000 is the annual gift limit, I believe, this year. So, five years of $18,000. What’s that? $90,000 a grandparent can put into a 529 account today. That money can grow. We invest the accounts and that can be used for the grandchild’s college tuition or expenses.

Again, it’s not counted on the FAFSA because the grandparent is the custodian of that account. And they just said, “You know, listen, we just took money that little Johnny will get in 20 years, 30 years, and we’re giving it to him now.” Okay. They could, if they wanted to pay cash to the institution, I just want them to avoid giving money directly to their child, which would be the parents or to the grandchild to jeopardize their financial aid.

Matthew Peck: And sorry, one last point, just to clarify. They can pay directly to the college?

Mark Kenney: Of course.

Matthew Peck: So, is that a gift or not a gift or what is that?

Mark Kenney: It’s considered a gift although…

Matthew Peck: Is it considered a gift. Okay.

Mark Kenney: Although, they’re pretty…

Matthew Peck: So, still subject to those $18,000?

Mark Kenney: Yeah. But remember gift splitting $36,000 for families. And they are a lot more lenient on debt going to students’ tuition than they are to buying them a car as far as the gifting limit is concerned. So, yeah, they can fund the 529 with up to $180,000 per two people. And remember the flexibility of the 529 too, not to be lost. If that child doesn’t use the money, the custodian, the grandparent can change the beneficiary to another child that’s going to use it or they can use it for some sort of other. I know we talked about rolling that over to a Roth IRA. That’s allowed now under the new rules. Or, yes, there is a 10% penalty on funds that aren’t used for qualified expenses, but it’s taxed at 10% and then the gains are taxed to the child, which usually doesn’t have high incomes at that point.

Matthew Peck: Yeah. As I mentioned, I mean, usually we talked about the high cost of the tuition, plus the Roth contributions, plus the fact that you can change the beneficiaries of the 529. That’s very, very… I’m not, with all the costs and everything we talked about, I’m not very concerned, especially with the new Roth rule where you can roll it into the Roth that there’ll be money left over in the 529 unless it’s an emergency of emergencies, meaning that most likely you would have to pay that 10% excise tax because you’d be able – there’s all these different valves or exits that you can do.

Mark Kenney: Yeah. $10,000 now can be used for student loan debt.

Matthew Peck: Oh, interesting. I didn’t know that.

Mark Kenney: Yeah. They open that up and $10,000 a year can be used for private high schools. Yeah. So, again, goes back to they’re expanding the options available to 529 accounts to incentivize parents, grandparents to save for college.

Matthew Peck: Excellent. Well, all right, now I have the most important question. What’s your favorite college movie?

Mark Kenney: Oh, man.

Matthew Peck: Aha.

Mark Kenney: There’s a lot of them. I got to stick two at home and go with Good Will Hunting.

Matthew Peck: Oh, alright.

Mark Kenney: Right? I mean, actually, it just happened to be on the other day and I rewatched it again, and just incredible movie. And the fact that those guys wrote it, it makes it even better.

Matthew Peck: Well, I just didn’t know if you’re into Animal House or Old School or PCU or Road Trip.

Mark Kenney: Yeah. There’s a lot of good ones. We’ll stick with Good Will Hunting.

Matthew Peck: All right. I think it’s a safe bet. So, Mark, thanks again so much for coming on.

Mark Kenney: Thanks for having me.

Matthew Peck: Hopefully, all of our listeners found it very informative. I know I did for sure. And you could tell there’s just so much there, not just in the program itself and all the mechanics and how it works, but how it bleeds into and brings up bigger questions like legacy planning. Like, okay, if I’m doing college planning, well, guess what? That has an impact on legacy planning and should I gift things now while they are alive? Or should I wait? It goes into income planning. How much debt can I afford at this point in time? And so, we’re talking about making sure people aren’t worrying and wondering. And these are the types of issues that people worry and wonder about whether you’re a parent or a grandparent. And I really hope that people found it informative and helpful as they navigate this very pricey landscape. So, thanks again for listening, everyone, and be well.

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