Presented by Jimmy Hicks | The College Funding Coach®
Based on College Funding Friday – August 15, 2025
When families start planning how to pay for college, they often think in terms of savings accounts, scholarships, or financial aid. But one of the most overlooked strategies for reducing your total college bill is right in your tax return.
In this College Funding Friday session, advisor Jimmy Hicks breaks down how to legally and strategically use the tax code to minimize college costs. The goal? Pay less for college and protect your retirement in the process.
What Is Tax-Efficient College Planning?
It’s the process of coordinating your college funding strategy with your tax strategy. This includes:
- Choosing the right tax-advantaged accounts
- Timing income and deductions wisely
- Leveraging education tax credits
- Structuring assets in a way that preserves aid eligibility and reduces tax liability
Start With the Big Picture: College Funding Is Not One-Size-Fits-All
College funding has to be personalized. What works for one household may not work for another, especially when tax brackets, assets, and timing vary so much.
Key concept: The right combination of tax-smart tools can reduce what you owe on college without sacrificing your retirement or lifestyle.
Key Tax Tools for College Planning
1. 529 Plans
- Tax-free growth when used for qualified education expenses
- State tax deductions may be available
- But beware: 529s count as parental assets on the FAFSA and may reduce financial aid eligibility
- Strategy tip: If you’ve saved in a 529, use invest those funds in equities strategically through (not to) the college years
2. American Opportunity Tax Credit (AOTC)
- Worth up to $2,500 per student per year
- Available for the first 4 years of college
- Phase-outs begin at $80,000 (single) and $160,000 (married) of MAGI
- As long as the student has earned income and is in college at least half time, they can use the credit on their tax return
- Note: If the student is claiming the credit, the parent(s) will not be claiming the student as a dependent on the parent(s) tax return
4. Cash-Value Life Insurance & Roth IRAs
- Do not count as assessable assets on the FAFSA
- Can serve as supplemental funding vehicles for college and/or retirement
- Must be carefully integrated into a broader financial plan
Common Mistakes Families Make
- Using student-owned assets last
Student assets are assessed more heavily on the FAFSA. Spend them first when possible. - Not coordinating with a tax professional
Many accountants focus only on minimizing this year’s tax bill. College funding requires a multi-year approach.
What High-Income Families Need to Know
Even if you don’t qualify for need-based aid, you can still benefit from tax-efficient planning.
For example:
- Reduce your taxable income by using municipal bonds and regularly implementing tax loss harvesting
- Use employer education benefits strategically (e.g., Section 127 plans)
- “Shape” business income and/or defer bonuses during FAFSA-relevant years
Jimmy emphasized that “every dollar you save on taxes and financial aid is potentially a dollar you don’t have to borrow.”
Action Items for Parents
- Review your adjusted gross income (AGI) and complete our College Money Report™ before your student’s junior year of high school.
- Coordinate a plan with your tax advisor in tandem with college planning team, don’t let them work in silos.
- Avoid rushing to use taxable investments all at once, spread out the distributions out over the college years to minimize the tax impact (unless you are trying to maximize need based aid, in which case you want to spend down the taxable assets as quickly as possible)
- Know the FAFSA calendar—income from two years prior is what counts.
Get Your Personalized College Strategy
The College Funding Coach® provides free tools and resources to help families make smart financial choices, now and for the long term.
Want to see how tax strategy affects your college costs?
Request Your Free College Money Report™
Watch the Recording
You can watch the full College Funding Friday session on Tax-Efficient College Planning featuring Jimmy Hicks anytime on demand.