Rupa Pereira
By Rupa Pereira
When I think of fall, I think of yellow, orange, red. Crispy, cooler mornings and leaves changing colors – love this time of the year! When I think of taxes, I think of black, white and grey. With that in mind, let’s dive into the monochromatic world of tax legislation and its impact on college planning.
Continuing our conversation from the previous month where focus was on personal tax legislation which ranged from extensions, new provisions, modifications to eliminations.
Extensions applied to Income Tax Brackets and Income Tax Rates and Estate Planning Tax rates:
New provisions included Trump Accounts, deductions on tip income, overtime income and higher deductions on senior income. Modifications involved qualifying criteria for healthcare marketplace subsidy and Medicare/Medicaid coverage as well as Itemized Deduction and State and Local Tax (SALT) limits. We also saw elimination of Residential Energy credits, few green tax subsidies and Electric Vehicle Credits as we’ve known for the past few years.
But that’s not all. Higher-Education Planning, Student Loan Planning will also be dramatically transformed due to significant changes to current landscape.
First with the positives. The One Big Beautiful Bill Act brought about several significant changes to 529 plans, making them more flexible for a wider range of educational expenses beyond traditional college tuition.
The law now allows 529 funds to be used for a broader range of K-12 education costs, including books, supplies, and online learning materials, not just tuition. It also permits funds to be used for educational therapies for students with disabilities, standardized test fees (like the SAT and ACT), and dual enrollment tuition. The annual per-beneficiary limit for K-12 expenses has doubled from $10,000 to $20,000. In addition, 529 funds can now be used for certain post-secondary credentials, such as professional licenses, certifications, and registered apprenticeship programs. This supports individuals who are pursuing vocational and technical careers rather than a traditional four-year college degree.
Moreover, under the terms of the OBBBA, funding of up to $5,000 per year is allowed towards a Trump Account held for a child born between 2025 and 2028. Parents and relatives can contribute up to $5,000 annually (adjusted for inflation) to the account, with funds growing tax-deferred until the child reaches age 18. Funds can be used for higher education among other qualifying expenses.
Now onto the gripes:
The new law limits financing options, making it harder for student borrowers to manage their debt. It affects families with college-bound students, current students and those that have graduated with student loans.
Besides education savings accounts, student loans were an acceptable way to finance a college degree. Undergraduate students would qualify for a Federal Stafford Loan or parents could borrow up to the full cost of attendance. For graduate degrees, Graduate PLUS loans existed that would permit those pursuing a master’s degree to borrow up to the full cost of attendance.
When repaying these loans, students could enroll in income-driven payment plans such as SAVE, PAYE, where they were permitted to pay a percentage of their adjusted gross income over a period of 20 or 25 years and possibly earn forgiveness at the end of payment term. Under certain income levels, payments could be $0 and would count as qualifying payment. In addition, Public Service Loan Forgiveness was available to eligible borrowers who were employed in qualified non-profit institutions and made requisite payments over 10 years.
Starting in July 2026, new borrowers will have only two main federal repayment options: a Standard Repayment Plan with fixed payments and an income-based Repayment Assistance Plan (RAP), which ties payments to income but requires up to 30 years of payments before forgiveness. Existing income-driven plans will be phased out, and borrowers will need to transition to the new system in 2028. The law requires a $10 minimum monthly payment under RAP, and a borrower’s RAP monthly payment will be based on their AGI (Adjusted Gross Income) and number of dependents.
The law eliminates the Graduate PLUS program, effective July 1, 2026, with legacy provisions for current borrowers to complete their program of study. For students in graduate or professional studies, effective July 1, 2026, the law caps the annual graduate loan limits at $20,500 for graduate students and $50,000 for professional students. The aggregate loan limit is capped at $100,000 for graduate students and $200,000 for professional students.
Under the new act, Parent PLUS loans will have a lifetime limit on how much they can borrow on their children’s education. The bill limits parents to borrow $20,000 per year for each child, with a total cap of $65,000 per student.
These newly instituted Parent Plus limits, coupled with restricted access to IDR plans, could mean that more families must look beyond federal loans for their education costs. Think of private student loans, home equity loans, distributions from retirement etc. While Federal Loans don’t have a credit-check, private loans for undergraduate students go through underwriting and most often require a co-signer with approvals/terms/rates being more restrictive than Federal Loans.
Since the fall season coincides with FAFSA and college application season, plan your moves accordingly since not all is black and white with how one pays for college.
Rupa Pereira is a CFP, EA, CSLP and an Advice-Only Planner and Tax Professional based in North Carolina. She specializes in cross-border matters and all things financial planning. Contact: info@fwjplanning.com
