Junior and his sister will be starting college in a few years. You’ve transferred GI Bill benefits, have some 529 funds and will have to pay some expenses out of pocket. But when should you use the different sources to pay for college? Well, like every good Weapons Officer said, “It depends.” Some of things it depends on are:
- How much you trust the government
- Where you are in your career
- If the kids will get any scholarships or go to a private school
How Much Do You Trust Uncle Sam?
If you trust the government to not change the rules for the GI Bill then delaying using GI Bill benefits makes a lot of sense. GI Bill keeps up with the inflation rate for college tuition (at least for in-state schools) with zero investment risk. That’s a pretty good deal. So, in this case you might want to use 529 funds and out of pocket first and then use GI Bill benefits.
Conversely, if you don’t trust the government to not modify the GI Bill, then use the benefits as soon as possible and save your 529 funds for later.
Where Are You in Your Career?
If you’re still on active duty, then you will likely qualify for the American Opportunity Credit (AOC…not that AOC). In essence, the government will pay for the first $2,000 of qualified education expenses for you via the $2,000 tax credit. If you will retire from the military while your kids are in college, then you might want to pay the first $2,000 in college expenses out of pocket expenses and use 529 funds for the reset while you’re still on active duty. Technically, you can also get an additional $500 credit if you pay an additional $2,000 out of pocket (not as good of a deal). This is due to the fact that your income may exceed the AOC phase out limit ($180,000 AGI) when you have a job in retirement.
If you’ve already retired from the military and you will retire, retire while the kids are in school then you might want to use GI Bill first and out of pocket funds and 529 funds after your retirement when your income will likely be below the limit.
What If Scholarships are Involved?
If both of your kids will go to an in-state school and one of them will get scholarships, then the issue isn’t timing but which child. Since GI Bill pays 100% of in-state qualified tuition and fees and scholarships received will be taxable income to the child. Whether or not income tax is paid depends on several factors but taxes could be owed on the scholarship money. In this case, use most or all of your GI Bill benefits on the child that won’t get scholarships and use your 529 funds for the child with scholarships.
The same logic applies if one child will go to a private school and GI Bill won’t cover all qualified expenses and both kids get scholarships. Then it makes sense to use the GI Bill for the child that will be attending private school.
Military Finances are Different
Just like a military career isn’t the same as a civilian career, military finances aren’t the same as civilian finances. If you’re going to get help with your finances, we think you should work with someone who deals with those differences every day. If you’d like to chat, give us a call or drop us an email.
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