Education Savings Vehicles

As the new year begins, so does the annual season of college acceptances and rejections. Many outbound high school seniors may soon find themselves holding a single sheet of paper with shaking hands and bated breath, eyes fervently scanning for the only detail that truly matters: Did they get in? In today’s hyper-competitive environment, being accepted into college is still an accomplishment worthy of celebration. Like most celebrations, however, the fun ends once the bill comes.

Since 1980, the median cost of college tuition has increased by nearly 260%. In the same timeframe, other consumer goods saw a price increase of 120%. This disparity between the cost of college and other common expenses illustrates a much larger issue: for many Americans, college is simply unaffordable. Besides taking out student loans, what recourse is available to students? Is there anything a student can do to make the money they put toward tuition work harder for them?

Thankfully, there are a few options. Federal and state governments have established special, tax-advantaged savings vehicles designed to pay for qualified higher education expenses. Two of the most common education savings plans, the Coverdell ESA and 529 college savings plans, offer federally tax-free distributions when used for qualified education expenses. Considering the similarities between Coverdell ESAs and 529 plans, it can be difficult to identify their differences and the advantages each plan has over the other.

Qualified tuition programs, commonly called 529 plans, are education savings vehicles established by states or state agencies, and can only be applied without penalty to qualified postsecondary institutions. 529 plans enjoy tax-free distributions for qualified education expenses. Qualified expenses for 529 plans include room and board, expenses for special needs services, and the purchase of any computer or peripheral equipment used primarily during the years a beneficiary is enrolled. This grants a much wider variety of uses at the college level. Some states, like Michigan, also offer fairly sizeable state income tax deductions for qualifying contributions. While 529 plans have no annual contribution limit, total plan balances are limited by an amount set by each state. It is also worth noting that contributions are considered gifts, and are thus subject to the annual gift tax exclusion. This means contributions are generally tax-free when total gifts between the contributor and the recipient are less than $14,000 for the year, but may be taxed if in excess.

A Coverdell ESA, or CESA, is a custodial account designed to pay the qualified education expenses of a designated beneficiary. It can be opened at most financial institutions in the United States for a beneficiary under the age of 18, or any beneficiary with special needs. Qualified education expenses for a CESA are expenses required for enrollment or attendance of a qualifying elementary, secondary, or postsecondary school. This ability to use a CESA at an elementary or secondary school provides a distinct advantage over 529 plans. CESAs typically also have more investment options than 529 plans, at a lower expense ratio. That’s about where the advantages over a 529 plan end, though. CESAs are subject to a $2,000 annual contribution limit, which is gradually reduced to $0 after a certain income threshold.

Coverdell ESAs and 529 plans each have their own distinct uses. For more information on the intricacies of each plan, and how best to fund education in your unique situation, contact your financial professional.

Income-Driven Student Loan Repayment Plans

As discussed in a previous blog post, federal student loans are eligible for a number of income-driven repayment plans. These plans can lower initial payments, ease the burden of interest, and even forgive all outstanding debt after a certain period of time.

The four income-driven plans that most federal student loans qualify for are the ICR, IBR, PAYE, and REPAYE plans. These plans set a monthly income-based payment amount, which is unaffected by the balance of the loan. After a certain number of years, called the Repayment Period, any remaining loan balance is forgiven. At that point, the forgiven balance is taxed as income.

To learn more about each income-based repayment plan, click on their name below.

Income-Contingent Repayment Plan (ICR)

This is the easiest income-driven repayment plan to qualify for, but often provides the least benefit. In this plan, the payment amount is set to the lesser of 20% of discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted for income. Any borrower with eligible federal student loans may make payments under this plan.
Repayment Period: 25 years

Income-Based Repayment Plan (IBR)

To qualify for the IBR plan, the payment you would be required to make must be less than what you would pay under the Standard Repayment Plan with a 10-year repayment period. If the payment is more than this amount, you won’t benefit from using an income-based repayment plan. The payment amount is set to 10% of discretionary income if you are a new borrower on or after July 1, 2014, or 15% otherwise.* This monthly payment will never be more than the 10-year Standard Plan amount.
Repayment Period: 20 years if you are a new borrower on or after July 1, 2014, otherwise 25 years
*For the IBR plan, you are a new borrower if you had no outstanding Direct or FEEL Loans when you received a Direct Loan on or after July 1, 2014.

Pay As You Earn Repayment Plan (PAYE)

To qualify for this plan you must meet the same eligibility requirement as the IBR plan, must be a new borrower as of October 1, 2007, and must have received a disbursement of a Direct Loan on or after October 1, 2011. Payments are set to 10% of your discretionary income, and are capped by the 10-year Standard Repayment Amount.
Repayment Period: 20 years

Revised Pay As You Earn Repayment Plan (REPAYE)

The newest income-based repayment plan, REPAYE, is often the most beneficial. Any borrower with eligible federal student loans may make payments under this plan, and the payment amount is set to 10% of your discretionary income. This makes REPAYE a good option for those seeking loan forgiveness under the PSLF program.
Repayment Period: 20 years if all loans you are repaying were for undergraduate study, otherwise 25 years

To determine which repayment plan is best for you, or if you have any questions about a specific plan, contact your loan servicer.

To apply for an income-driven repayment plan, you must submit an Income-Driven Repayment Plan Request. This can be obtained from your loan servicer, or submitted online at

Public Service Loan Forgiveness Program (PSLF)
A final consideration concerning repayment plans is the Public Service Loan Forgiveness Program. PSLF only applies to full-time employees of certain public service employers, but can forgive all remaining loan balance in as little as 10 years. Unlike the other income-driven repayment plans, any balance forgiven under PSLF is not taxed as income.

This program stipulates that any qualified employee who has made 120 qualified, monthly payments toward a qualifying loan will have the remining balance on their eligible loans forgiven tax-free. These 120 payments must be under one of the above plans, the 10-year Standard Repayment Plan, or a similar Direct Loan repayment plan with a monthly payment at least equal to those of the 10-year Standard Plan.

Public service sectors that qualify for this program include military, public schools, any federal, state, local, or tribal agency, law enforcement, public safety, and not-for-profit tax-exempt 501(c)(3) organizations. For a comprehensive list of government agencies and departments, visit


The Positive Today

We wake this morning to a new day, one that has had the world markets tumbling overnight at the news of our US President elect. I write this before the markets in the US open, already aware of a 5% drop in value. When the market opens at 9:30 a.m. EST, the markets will probably continue their downslide.

It may be tempting, but the event of a presidential election is not an event that should cause panic. Nor is it an event that should trigger impulse decisions. If anything, a downturn in the market provides us with opportunities.

Today, and probably for a few days or more to come will be a good time to sell off holdings in taxable accounts that are at a capital loss; thereby creating a tax benefit for, potentially, years to come. You remember the old adage, “buy low, sell high?” The next few days will bring us opportunities to buy low.

Historically, volatility in the market displayed around a presidential election does not last long. Historically, the markets do rise. I expect no different following this election. How far will the down go down? When will the up begin to go back up? Well, my magic crystal ball gives me no answers today. What it tells me is that now is a good time to take advantage of the opportunities provided.

  • Now is a good time to consider and write down your goals for the next six to twelve months.
  • Now is a good time to realize that only you are in-charge of your future.
  • Now is a good time to remember that you are in control of how you respond to everyday challenges.
  • Now is a good time to remember that you are in control of how you treat all life around you.

Your smile and kindness are yours to share. Today make lemonade out of market lemons. Take a moment to breathe and center yourself; find your positive spirit and pass along positive kindness.

At Harbor Light Planning, we do not believe in market timing, nor do we have discretion over client assets. We do not trade without your knowledge and approval. If you would like to take advantage of the tax and buying opportunities handed to us today, please contact your financial advisor. They should be able to provide recommendations based upon current capital gains/loss reports in your taxable accounts and provide recommendation on buying opportunities available with cash in your accounts (taxable and otherwise).

Entering the World of Social Media

Clean and Neat Social Network Buttons-128x128 (1) Thirteen years ago I opened the doors of Harbor Light Planning. Since then, I’ve done everything possible to avoid social media for business purposes. Why? Good question. I think for the majority of the time, I didn’t have the time. Since I didn’t have the time, I didn’t want the extra responsibility to create content, but more so, I didn’t want the added level of compliance complexity using social media brings into the fold.

I’ve watched social media grow to a point where it has become impossible to ignore. I still don’t have a twitter account, I don’t use pinterest and I use facebook for purely personal purposes. So, why start now?

I recently decided that my time as a solo practitioner was not doing all I can do for the financial planning industry. Our industry has done a great job getting the word out how important it is for everybody to employ a fee-only financial planner. Our industry has done a great job educating young people about how great a career in financial planning can be. The disconnect comes in that most fee-only financial planning firms are extremely small. Therefore, not providing enough financial planning college grads with job opportunities, or ability to learn from those more experienced. I was lucky enough to be hired by a firm, to learn, to grow, to become successful (with them or on my own). Now has come the time to pass on my 25+ years of experience in tax and financial planning to the next generation of planner.

A few months ago, my practice of one doubled in size to become two. In all honesty, to double in staff size brings a need for new clients. Which types of prospective clients will be the right type of client for our newest staff? Well, most clients like to work with someone like them, and most planners also like to work with someone like them. Although it’ll be at least year before Kyle will be ready to service clients on his own, he deserves clients that can relate to him and vice a versa. The ideal client demographic for his age, use social media, a lot.

Stay tuned for information on our New Journey’s program designed specifically for the young professional.