Let’s assume a recent high school graduate has 2 years of schooling left to complete their night-school degree at a commuter college where tuition is $4000/year. The individual is set to make $40,000 in 2026 with a $2600 federal tax liability and a $1200 state tax liability. The individual resides in a state that gives a 20% tax credit for 529 contributions (up to $1,500) but saved nothing for college thus far. Does it make the most sense for the individual to take out a $4,000 loan this year to pay their tuition bill, gaining access to the full $2,500 federal AOTC…and put $4,000 into a 529 to gain the $800 state tax credit, then pay back the $4,000 loan next year, effectively reducing the year’s tuition to $700+interest?
New to College?
Read our Complete College Guide →AOTC/529…help me find any errors/inefficiencies in my thinking…
Brianmain
104 XP
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1 reply
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AnitaCarr
2 weeks ago
I'm actually doing something very similar with my kid. I have enough 529 to cover his tuition but I let him take the subsidized loan since he doesn't have to pay interest until after finishing school. My state is not as generous as yours but I do get some benefit for contributing to 529. I don't plan to pay off his loan until after he finished school. Just remember you can only use up to $10K of the 529 to pay off student loans. Another thing to keep in mind is that AOTC can only be used for 4 years.