The media really likes to remind us that the cost of a college education is becoming evermore out of reach, especially for lower income families. Crushing student loan debt has also become the norm, as Americans owe over 1 and a half trillion dollars on student loans. The future appears bleak. Thankfully, Uncle Sam wants to help the parents of future college students in a big way. They just have to play by the rules.
Yes it’s true. The US government is willing to send your child or children to a prestigious college of your choice no questions asked. There is no way that is happening you’re thinking. What’s the catch?
No catch, the only stipulation is to live on a reasonable income. If a fancy college isn’t what you really want your child to go to or they decide otherwise when the time comes, no worries. You can have a stream of income or “pension” courtesy of Uncle Sam. In this article I will lay down the possibilities and give you the road map to receive this valuable government benefit.
The Earned Income Tax Credit
The tool that is used to make all of this happen comes out of the US tax code called the Earned Income Tax Credit or EITC for short. This is used in combination with the Child Tax Credit or CTC for short. Both of these utilized to their fullest extent, are able to produce the capital necessary to fully fund a college education. No debt necessary.
Utilizing the EITC is fairly straightforward. Here is a quick guide on how you would qualify for it.
The biggest keys to keep in mind to get the full benefit are:
- Have earned income between:
Married File Jointly Single
1 Child = $10,150 – $24,350 $10,150 – $18,700
2 Children = $14,250 – $24,350 $14,250 – $18,700
3 Children+ = $14,250 – $24,350 $14,250 – $18,700
- Have less than $3,500 in investment income
- Have a qualifying child
- Have Adjusted Gross Income (AGI) not exceed earned income or vice versa
- Have a workplace retirement plan (Bonus if you and your spouse have one) as well as a High Deductible Health Plan with accompanying Health Savings Account
The last key is not a must but it is if you make over the high end of the EITC phase out threshold, which is $18,700 if single or $24,350 if married.
The Choices We Make
The main key to all of this working out as stated earlier is to live on a reasonable income. That reasonable income is $18,700 if single and $24,350 if married. I know what you’re thinking. How on earth can anyone live on that amount of income especially if you’re raising kids!? Well therein lies the rub.
The fact is, is that’s a good amount of money to live comfortably on in most anywhere in the world. No, you won’t be able to live in Manhattan raising a family outside of a cardboard box on $24,350 a year. You will have to make some sacrifices and have a change in mindset [https://www.tripplefiguy.com/one-key-to-unlock-explosive-growth/].
What more motivation [https://www.tripplefiguy.com/motivation-the-engine-that-drives-us/] do you need though? The government is going to send your kid(s) to University paid in full. Did I also mention you’ll be able to retire after your kids go off to college?
The fact of the matter is, is that there are many families living on that amount of income and lead perfectly happy lives. We must weigh the real opportunity costs with our spending in order to see the big picture, to see all of our options. One of those options consists of our children receiving a college education on the government’s dime. Or, if our children find other interests, then having a nice passive stream of income for ourselves year after year.
Seeing opportunity costs is us asking ourselves, “Is living in a bigger house worth giving up college for my children?” “Is living further from work and commuting worth giving up a healthy stream of passive income?” “Is going out to eat regularly worth going to work years longer than we need to?” These are questions we need to ask ourselves and face head on.
Ok, you’ve decided to live well on less. Now I hear you wondering, what happens if my earned income is above $24,350? Well since the way the EITC works, after certain amounts, it begins to “phase out” until it completely goes away (boo). I refer to this as the “phase out tax.” So, what do we do if we have more “earned income” than $24,350 (Married) $18,700 (Single)? Remember that I mentioned workplace retirement plans?
How Free College Works
Being one of our keys, you have a workplace retirement plan, either a: 401(k), 403(b), 457(b), TSP, SIMPLE IRA, or SEP IRA. The money contributed to these types of plans will not show up as earned income reported to the IRS on your W2’s. The money was never in your possession as income, just deferred into your individual retirement plan. So say your made $43,350 gross annual income but you deferred the max amount into your 401(k) of $19,000. Now your earned income equals $24,350, which gives you the full benefit of the EITC!
Also of note, money contributed to an HSA also reduces your earned income. So let’s use our sole breadwinner example, one spouse works while the other stays at home to watch the kids saving on childcare costs. The working spouse maxes their workplace retirement account of $19,000 and also contributes the maximum to their family HSA of $7,000 (Both spouses are covered under a high deductible health plan). The gross family income is $50,350 but their earned income comes to $24,350 and thus fully being able to utilize the EITC.
Let’s say that both spouses work and have workplace retirement plans. Each can max their plans out as well as their HSA brining their total income for the year and still being able to fully utilize the EITC to $69,350. This is the top range of income to fully benefit from the EITC by using deferred accounts to the fullest extent the IRS allows. You can certainly make more than this and still get the EITC but it will just be reduced until it goes to zero after your income becomes too large.
Here is the amount you will receive in credit if utilized fully depending on how many kids you have:
- $3,461 + 1,400 child tax credit refund
- $5,716 + 2,800
- $6,431 + 4,200+
With this credit you also receive a bonus amount of $1,400 per child that is refundable to you which is the Child Tax Credit. All of this money is complete tax-free as well! Keep in mind that these numbers may change a bit after 2025 due to the expiration of the Tax Cuts and Jobs Act.
Now, with these credited dollars, you are not going to just go blow it all because of the nice little windfall. What you will be doing is putting aside this money into a Roth IRA and investing it, which will let it grow tax-free.
Assuming our investments capture the historic rate of return of the overall stock market after inflation, here is what the accounts will look likebased on the number of children after 17 years of receiving the credits and investing them:
Total after 17 years Invested (7% return assumed)
1- $160,407 Income/yr = $6,416.28
2- $281,017 Income/yr = $11,240.68
3- $350,810 Income/yr = $14,032.40
We also can see how much income a year we could potentially have of the money was not used for college. This income stream is based of the 4% rule which is generally accepted as the withdraw rate on a portfolio in order to not exhaust it indefinitely.
As you can see, with these account values, this would provide the capital to fund your child’s education. This is not even taking into account any Federal Aid, scholarships, or grants.
What about that retirement I promised earlier for the parents? Well, remember the money we’ve been diverting into workplace retirement accounts in order to get the full benefit of the EITC? Here are the values of the accounts after 17 years:
Value of Workplace Retirement accounts after 17 years
1 401(k) = $626,980 2 401(k) = $1,253,960 2 401(k)+HSA=$1,484,956
$625,000 is enough to support $25,000 a year in withdraws following the 4% rule. Coincidently, that’s about right at the amount we’ve been living on the past 17 years. As long as one spouse works and is making $43,350 a year, maxing out their 401(k) at $19,000 a year, living on $24,350 a year. Their child is getting the education paid in full and their retirement is covered after only 17 years of working.
A side note, this isn’t even taking into account the rising dollar amount of the EITC phase out range nor the ever increasing 401(k) max contribution limit as well as any raises the family will receive.
The Choice Is Ours
Of course, we could always just throw our hands up at all of this and reason that we can’t live on that low of an income. Then whine and complain that college is too expensive and let our children continue to be weighed down by crushing debt. We’ll choose to value living in a McMansion in the city and turn our minds off to opportunity cost while we wait in the drive thru in our gas guzzling SUV to order our Grande double Mocha on our way to work like we’ve always done.
Along the way, we’ll be paying the taxes to fund somebody else’s kid to go to college whose parents decided to sacrifice a little to benefit from the EITC. What side of the fence do you want to be on?