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Funding your Education and Managing Student Loans

In my practice I have found that clients who are going back to school, currently in school, or just left school have many little known tax planning opportunities. The problem is most people don't seek advice until after they have finished grad school. Below are some strategies and little known facts available to current and former students.

You can use your IRA penalty free to fund your education

I typically don't recommend withdrawing from an IRA because of the penalties associated with it and the fact that the money taken out puts you in a higher tax bracket.  In most cases the cost outweigh the benefits, however, if you are currently working and taking time off to go to grad school this is a perfect opportunity to save some tax dollars.  You can use any amount of an IRA to fund your education penalty free. Funding your education would include room and board, supplies, and tuition. If you are working and making 100k a year, you will be saving your higher tax rate on all the cash that you stash away in the IRA or 401k (which you can rollover into an IRA). If you live in New York City, your effective tax rate is around 32%. The years when you are in school  (if full time) you will likely be at a much lower tax rate. You could potentially take that money right back out the following year that you are in school at no penalty and no tax. Even if you are working or are funding your education with student loans, you are allowed to take money out of the IRA penalty free. That money could be used later for a down payment on a house or other expenses. The moral or the story is if you need money from your IRA, take it out when you are a student. Here is an excerpt on the topic from the IRS:

"Higher education expenses. Even if you are under age 591/2, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax generally is the amount that isn't more than the qualified higher education expenses (defined next) for the year for education furnished at an eligible educational institution (defined below). The education must be for you, your spouse, or the children or grandchildren of you or your spouse. When determining the amount of the distribution that isn't subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds. • Payment for services, such as wages. • A loan. • A gift. • An inheritance given to either the student or the individual making the withdrawal. • A withdrawal from personal savings (including savings from a qualified tuition program)."

You can save some money by using a 529 account even if you don't already have one.

Another little known fact related to saving on taxes for higher education is that there is only a 14 day requirement between putting money in and taking it back out of a 529 account. In NY you can save state tax on up to 10k saved for higher education expenses.  If you have expenses you can literally put money in the the 529 account and take it right back out to fund those expenses and still get the tax break. Be sure to research which expenses qualify as higher education under the 529 account before using this strategy. 529 accounts are also great because you can change the beneficiary to yourself, your spouse, your children or grandchildren. If you are saving for your education and decide not to go back you can always use those funds for your children later.

If you work for the government or a non profit organization you may qualify for Public Student Loan Forgiveness (PSLF)

If you are employed by a government or not for profit organization you may be able to receive loan forgiveness under this program. The PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. So if you work for the government or a not for profit for 10 years, have made payment under an income driven repayment plan (your loan service provider should be able to provide additional information) your loans can be forgiven. This program has had some issues with people now reaching the 10 year mark and not qualifying because of misunderstandings with the requirements so be sure to do your research or seek expert advice.

Student Loan Refinancing can save you money and shave years off your repayment period

You have a good chance of lowering your interest rate and shaving years off of your repayment period by refinancing. Many new banks have emerged as go to providers of student loan refinancing such as SOFI, First Republic, and Earnest.  Give them a call and see if this is an option for you. If you are considering PSLF remember that this program is not for private debt, and the government will not pay off the refinanced loan. Be sure that you don't want to pursue PSLF before refinancing.

Alicia Jegede is a CPA and financial planner at New Gen Financial Planning, LLC. 

Disclaimer: This article is provided for general information purposes only. Nothing contained in the material constitutes advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Alicia Jegede.  All rights reserved.