Best way to save and pay for college?

September 20, 2020

Jack Wang is a noted expert in helping US-based families with middle to high school age students lower the cost of and pay for college by navigating the complex, stress-inducing financial aid system while still being able to retire. He’s helped hundreds of families and students (including his own two children) navigate financial aid, student loan options, and payment strategies in the context of overall family finances and retirement plans.

He has joined the Entrepreneur Avenue family and today, he is going to share the best way to save and pay for college.

Read on.

You will be happy you did.

And Welcome to Utility Avenue, Jack!


best way to save and pay for college
Photo credit: Odette Photo+Art LLC

Best way to save and pay for college? Start a business!

Or…how to get a scholarship from the IRS. No essay required!

Disclaimer: This article is for educational purposes only and should not be construed as tax or financial advice. Please consult your own tax and/or financial professional to discuss your specific circumstances.

One of the most expensive things we buy as a consumer may be college education for our children. I’m sure you’ve seen the headlines about the record $1.54 TRILLION student debt burden (Federal Reserve Bank of NY, Household Debt and Credit Report, Q2 2020) as well as spiraling tuition, now over $80k at the most expensive universities.

I’m not joking (that much) when I ask clients if they would rather buy a Ferrari instead of sending their kid to college. The Ferrari may be cheaper!

As entrepreneurs and small business owners, we have a decided advantage in paying and saving for college – the IRS! More specifically, the tax code. This is probably the only time you’ll ever view the IRS or the 70,000-page tax code in a positive light.

What most people do

When thinking about saving and paying for college, most people think of 529 plans. These savings vehicles are popular for many families to save money, tax-deferred, and then upon using the money for either college or private K-12 education, tax-free.

Think about the money that goes in. It’s after-tax. Meaning, we earn income, have taxes and various deductions withheld, and hopefully have something left over after our bills to put into these accounts.

Some states do offer a state tax deduction or credit for savings. For example, Massachusetts offers a tax deduction for the MA income tax for saving in the MA 529 plan. Other states provide a contribution at birth or a matching contribution. Maryland offers a matching contribution for low-income families.

As good as some state tax incentives are, there is nothing at the federal level.


Using business to save/pay for college

It’s about understanding the tax code. This is really in the category of tax planning instead of tax preparation – which is what most people think of. These strategies below really require working with tax and financial professionals BEFORE you implement.

Hiring your kid

The most basic strategy is to hire your student “on the books” in a business owned by a parent. Meaning, make them a legitimate employee, run payroll, etc. and not pay them under the table. They have to be paid a reasonable wage for good work that is within the capability of the student. In other words, you can’t pay your 5-year-old to perform advanced accounting work at $100/hour!

Let’s suppose you hire your student and pay them $100 (on the books). That salary is now a legitimate, deductible business expense and earned income for the student. Let’s further suppose that your tax rate is 20%, and the student is 0%.


Business Student
Wages Paid / Earned $100 $100
Taxes save / paid $20 (20% of $100) $0 (0% tax rate)
Net expense / income $80 $100

Now, your student can use the $100 earned to pay tuition. Think about where that money initially came from – a tax-deductible expense. In this example, the business got an indirect tax deduction for the student’s tuition payment. You and your student got a $20 “scholarship” that didn’t require an essay!

While there’s no age limit on how old your student has to be, the work to be done largely defines the age. Generally speaking, you’re likely considering young teenagers and older for most businesses.

Please note that while FICA taxes are not due for those under age 18, and Federal unemployment (FUTA) for under age 21, there may be state tax obligations that would still be required. Check with your tax person or payroll services provider.

Income earned by the student is tax-free up to $12,400 (standard deduction for 2020), but anything more than $6,970 (FAFSA guidelines, 2020-21) earned will, potentially, impact their college financial aid negatively for the majority of schools in the US.

Where to save the money if your student has a few years before college

Once your student has earned income (i.e., from work, not interest earned on a bank account or similar), your student is eligible to open an IRA. Since their tax rate is 0% for income under $12,400, it pays for the student to save in a Roth IRA up to $6,000 (2020 contribution limit) or a similar tax-free vehicle.

A question I often receive is whether or not someone under age 18 can open an IRA. Yes, the IRS does not stipulate on minimum age, as long as the requirement for having earned income is met. As a parent, you would sign the account documents, but the student would own the IRA.

I also get asked about saving in a traditional IRA for the tax deduction. But why do it? With income under $12,400, their tax rate is 0%, so you aren’t saving any taxes by using a traditional IRA.

When paying for college, the student can then withdraw the Roth IRA contributions anytime tax-free and penalty-free. Or borrow for college, and then withdraw to pay off the loans after graduation, depending on financial aid specifics.

Think about the potential – if you hire your kid at age 13, paying them $6,000 per year and then save, you’ll have $30k of tax-free money by college time – that’s a nice amount and a bunch of taxes saved!

Section 127 benefit

Otherwise known as the educational reimbursement benefit companies can offer workers. This works better for graduate school if your student is over age 21, no longer a dependent, and is not an owner of the company.

This benefit of up to $5,250 per year would require offering the same to all employees, but that can be an excellent strategy for recruitment and retention. Payments would be deductible to the business and tax-free to the employee.

The recently passed stimulus package, the CARES Act, expanded this program to allow employers to provide benefits for student loan payments, not just educational expenses incurred in the current year. This provision expires at the end of 2020.

Section 132 Fringe benefit

Similar to a Section 127 benefit, though, the difference here is that the education typically has to be job-related. Some companies offer this reimbursement if an employee takes courses to further their career directly or is directly applicable to their job.

Paying for college can be daunting and stressful. Parents and students alike have questions about admissions and financial aid – and both aspects of college planning are extremely complicated.

Final words about the best way to save and pay for college

One of the most common questions I’m asked about is how to get more scholarships and financial aid. Being self-employed or a business owner, the answer is Go to the IRS. The money is there – it’s up to you to get it! No essay required!


Jack Wang’s Contact Info

Website –

Facebook –

LinkedIn –

Youtube –

Quora –