As 2025 comes to an end, many people begin setting goals for the New Year. It’s a busy season, but it’s also the ideal time to review your 2025 finances and plan for 2026. Families paying for college or managing student loans should pay special attention now. A quick review could uncover ways to save or even find free money. Because the tax year and school year don’t align, you may need to complete specific actions before December 31st
In addition, the One Big Beautiful Bill (OBBB) brought significant legislative changes affecting both college funding and student loan repayment, going forward. The OBBB Act has sweeping changes to how families finance higher education and manage student loan repayment. These changes are another reason families need to plan strategically for college costs and student debt. Below, we’ve outlined key areas to review.
2025 Tax Filing Importance is Critical
Over the past few years, the Department of Education (DOE) has required the use of IRS data in its systems. For example, the FAFSA form requires each submitting student and their contributors to use the IRS integration. How parents file their taxes will determine who needs to get an FSA ID for FAFSA Submission.
Due to multiple delays in student loan repayment, 2025 tax filing decisions will be critical for federal student loan borrowers. Over 60% of borrowers use an Income-Driven Repayment (IDR) plan to repay their loans. We expect the same IRS requirements for the FAFSA to apply under the new student loan repayment changes. Federal student loan borrowers who are in repayment or will enter repayment in 2026 should complete the proper tax filing analysis. This would include the borrowers enrolled in SAVE, students graduating in 2026, and those planning to change repayment methods for other reasons.
Tax Scholarship Planning
Often overlooked, proper tax planning can save families thousands of dollars by using the tax code to their advantage. We call this planning “Tax Scholarships.” These tax credits and deductions reduce the families’ out-of-pocket costs by minimizing their tax bill. It increases their refund or minimizes their tax payment.
These tax scholarships cost nothing, and you can get cash back by understanding the different education tax rules. Our team customizes every strategy to match each person’s specific needs. How you pay for college and manage your income will directly impact your educational tax credits and savings. Below is a quick snapshot of the key areas to review. Each strategy has a more in-depth explanation of the benefits below:
- Financial Aid Position Planning
- Income Taxes and Financial Aid
- 529 Plan Review
- American Opportunity Credit & Other Tax Incentives
- Student Loan Plan/Review current Student loans
- Tax Review for the Student Loan Borrower
- Review the Company benefits for the Student Loan Allowance benefit
To pay for college successfully, parents and advisors should understand financial aid, college savings plans, tax credits, student loans, and repayment options. This lack of understanding, planning, and transparency has contributed to student debt exceeding $1.8 trillion. Today, student loan debt is the second-largest form of debt held by Americans, behind home mortgages.
With IRS data now integrated directly into the Department of Education (DOE) systems, thoughtful tax planning has become essential. Here are some often-overlooked strategies to help you maximize 2025 and create a stronger plan for 2026. The PayForED website offers tools and insights to guide families through these critical educational and financial decisions.
Financial Aid Positioning Planning
One of the first things parents and students need to understand is their financial aid position. After completing the FAFSA, the family’s SAI (Student Aid Index) is calculated. This is the starting point for any good college funding plan. Schools will have either the Federal or Institutional Method. Completing the FAFSA form generates the Federal SAI, and families most commonly use the CSS Profile to calculate the institutional SAI.
For most families, income represents the most significant component of the Student Aid Index (SAI). This information is drawn directly from the federal tax return (Form 1040) and transferred into the FAFSA. While the SAI is often thought of as a single figure, it is actually the result of four distinct calculations: parent income, parent assets, student income, and student assets.
It is also essential to understand that tax years do not align with academic school years. Families should review their SAI before December 31 of the student’s sophomore year. For dependent students, the base SAI is calculated using tax data from the second half of the sophomore year and the first semester of the junior year.
High School FAFSA Planning Calendar Example
Financial aid planning can be confusing, primarily due to a timing change known as Prior-Prior Year. The Department of Education introduced this adjustment to simplify the FAFSA process and increase transparency. With this change, families can use already-filed tax returns when completing the FAFSA, reducing stress and uncertainty.
For instance, a high school senior (class of 26) completing the FAFSA will rely on 2024 tax information for the 2026–27 academic year. This initial FAFSA filing is referred to as the “base year.” The chart below helps illustrate how the financial aid timeline aligns with the corresponding tax years.
Income Taxes and Financial Aid
As mentioned earlier, a family’s income is typically the most significant component in determining their SAI. A typical college-planning strategy is to contribute to a tax-deferred retirement plan, such as a 401(k), 403(b), or 457 plan. Under the FAFSA Simplification rules, doing this has a significant advantage because these contributions are no longer included in the SAI calculation.
Traditional IRA contributions, however, are still included since they appear on the 1040. This is related to the IRS data integration. Contributions to company-sponsored deferred plans can be beneficial, as these amounts are included at a reduced rate of up to 47% in the SAI calculation.
Check the timing chart above to see how contribution timing can affect your financial aid. For some families, this requires weighing the long-term tax-deferred benefits against the short-term cash-flow advantages of postponing contributions.
Using Grandparents’ or other Relatives’ 529 Money
Before the FAFSA Simplification Act, payments from non-parent 529 plans counted as student income the following year. Under the new rules, this money is no longer counted in the FAFSA calculation.
The SECURE Act also makes 529 plans more flexible and reduces the risk of overfunding. Families can now use up to $10,000 of 529 funds to pay student loans, transfer unused money to another child, or roll it into a Roth IRA. These options make 529 plans more flexible for families, especially grandparents who want to leave a legacy.
529 Plan Contribution Before 12/31
A common goal for many families is to start a college savings plan for their children or grandchildren. If this is part of your plan for 2025 or for the coming year, it is essential to make contributions before December 31 of this year. One of the main reasons to act promptly is that many states offer income tax deductions for contributions to a 529 savings plan, making it wise to review your state’s program first.
Currently, 32 states have some state income tax incentives for 529 contributions. In most cases, the deduction applies only when using the in-state plan. However, the states—Arizona, Arkansas, Kansas, Maine, Missouri, Minnesota, Montana, Ohio, and Pennsylvania—let families claim the deduction even when they contribute to an out-of-state plan.
Families with children in college often overlook these tax advantages. In many situations, contributing to a 529 plan while the student is still in school can provide additional tax benefits, depending on the state and plan. Many people assume that 529 plans are only helpful for pre-college savings, but taking advantage of state income tax incentives can add up to thousands of dollars over time. A 529 plan can strengthen both a family’s annual tax deductions and its overall college savings strategy.
Understanding the differences between state plans can also benefit relatives wanting to help pay for college. Comparing plans may allow a donor to open an account in their own state or gift funds to the parent if the state’s plan offers a better tax outcome.
Finally, it is essential to remember that these tax deductions follow the calendar tax year. Unlike IRA contributions, they do not have an extended deadline. You must make contributions by December 31st to qualify for a state income tax deduction.
American Opportunity Credit and Other Income Tax Incentives
Timing is everything in proper tax planning. Paying a tuition bill can make or break your ability to take advantage of an educational tax credit.
Many families miss out on these tax savings because they wait until after the first of the year to think about their taxes. As college funding becomes more complex, families should review their year-end situation with a tax advisor before December 31. Doing so will minimize the risk of forfeiting potential educational tax incentives.
A good example is the American Opportunity Credit. Don’t let your 529 plan payments cost you a tax credit. Many families pay college bills—including tuition, fees, room and board, and books—entirely with 529 funds. But if you do, you could lose out on the $2,500 American Opportunity Credit. Under current tax rules, you can’t use the same qualified expenses for multiple tax incentives. In other words, if college costs were paid with only 529 plan money, a parent could not reuse those same expenses to qualify for the American Opportunity Credit. To maximize your savings, coordinate 529 payments with other tax credits before you pay the bills.
Many families make mistakes when they don’t plan 529 payments carefully. If a family uses 529 funds to pay all qualified expenses, they won’t be eligible for the credit mentioned above due to the qualifying rules. Fortunately, the solution is simple if you qualify for the credit — increase your payments for the upcoming semester. To claim the full credit, you must pay $4,000 of qualified expenses directly by December 31.
Student Loan Planning
Projecting student debt through graduation is part of the college financial process that families often overlook. Colleges typically provide financial information for one year at a time. As college costs continue to rise, more families must finance a larger share of these expenses. The challenge with the current system is that parents and students cannot easily envision what the monthly payments will look like after graduation.
Year-end is the perfect time to take control of your family’s college finances. PayForEd helps you see the whole picture by collecting your current debt, projecting costs through graduation, and mapping out all available loan repayment options. It even creates a personalized budget to guide your next steps. With more students changing majors, transferring schools, or taking longer than four years to graduate, understanding the financial impact now can help you avoid surprises later and make smarter decisions for the future.
As noted earlier, student debt is a growing concern for your children’s financial futures. Studies show that it contributes to delays in home purchases, marriage, and the start of a family, among other milestones.
Student debt is becoming an even bigger concern for parents: people over 50 are the fastest-growing group of borrowers, and about one in three say educational expenses are delaying their retirement. The OBBB Act established borrowing limits that will further affect parents using Parent PLUS loans to cover college costs. For more details, check out our college blog article on Parent PLUS loan limits.
Reviewing Your Student Loans
Students and parents need their FSA IDs to check federal student loan information. Start by logging in at StudentAid.gov with your FSA ID and password. Once logged in, you can see your federal loans and grants. Parents will find Parent PLUS loans under their FSA ID not the students.
Understanding the types of student loans is crucial. The type of loans used to finance college affects the repayment and forgiveness options available to both students and parents, and can help avoid any surprise debt.
Many parents may not realize they are legally responsible for certain loans, such as private student loans they co-signed or Parent PLUS loans they took out. Co-signers have the same financial responsibility as the student borrower. A student default can damage a co-signer’s credit and limit their future borrowing power. As mentioned above, Parent PLUS loans will now have loan limits. This is another reason why parents should review and create a family plan for paying for college.
Tax Review for the Student Loan Borrower
One of the new complexities of student loans is the increased use of Income-Driven Repayment (IDR) methods. Since 2016, IDR usage has increased by over 170%. These methods make the monthly payment more affordable in most cases. The IDR payment amount is tied to the borrower’s Adjusted Gross Income (AGI) on their tax return and requires tax planning for best results.
For example, a married couple could have up to 126 options to select from, which is why they need to review their tax filing options. It gets even more complex for a borrower who has recently gotten engaged or married in the past year.
In our blog, “Married Filing Separately with Student Loans,” we explore the complexities borrowers face when navigating repayment options. Borrowers should review their tax filing strategies, understand the structure of their student loans, anticipate potential income increases, and consider whether future career choices could make them eligible for Public Service Loan Forgiveness.
IDR Income Recertification Restarting
Many borrowers may be surprised by their new monthly payment amounts. When using an IDR method, the borrower must recertify their income each year. Due to COVID and the SAVE lawsuits, many borrowers have not recertified their income since 2019. This is the primary reason why 2025 tax filing decisions are so critical.
With all the changes related to the OBBB and the 7.5 million SAVE borrowers that need to change repayment methods, proper planning is required. We are seeing some clients experience a 4x increase in their current payments due to a variety of reasons.
Borrowers who use an IDR method need to know when their Income Recertification date is. Some may not even realize they have one since income recertifications have not been processed in 5 years.
To change your IDR repayment method, you must submit verification of your current income. Typically, this would be a pay stub, W-2, or 1040 tax return. Many people will need to either update their income due to recertification or a change of method. I find the 1040 tax form to be the best option since it properly reflects the number of dependents and the borrower’s lowest Adjusted Gross Income (AGI).
An essential factor for married couples with only one federal student loan borrower is that they need to consider filing married and separate when using an IDR method. This may increase their tax exposure, but a lower monthly loan payment should offset it.
Review Your Benefits
Student debt affects a large share of today’s workforce, and many employers now recognize that student loan assistance is a valuable part of a competitive benefits package. Be sure to review your company’s benefits to see whether programs are available to help reduce the cost of college or support your student loan repayment.
PayForEd’s college funding and student loan repayment tools are now offered through financial wellness platforms as a voluntary benefit. By reducing financial stress, employers can create a more positive and productive workplace. The employees can then make more intelligent and confident financial decisions.
The 2020 CARES Act also provides employers with a tax-free incentive to match employee student loan payments. This benefit follows the same guidelines as Section 127 tuition reimbursement. For the 2025 tax year, employers can match up to $5,250 in student loan interest and principal payments, applicable to both federal and private loans. Under the OBBB, this tax incentive was made permanent and should see increased company adoption in the coming years.
College Funding and Student Loan Year-End Planning Summary
Paying for college and managing student loan repayment has become increasingly complex. With the proper planning, however, families and borrowers can make informed choices that reduce costs and avoid unnecessary debt. The PayForED approach simplifies college funding, allowing students to envision their financial future without being weighed down by unexpected or excessive student debt.
For those with student loans, understanding all available options is crucial. A common misconception is that loan servicers can provide all the answers. As Income-Driven Repayment plans become more common, borrowers need personalized financial and tax-related advice to find the best path forward—guidance that servicers are not legally allowed to offer.
PayForED provides the tools and expertise to help borrowers confidently navigate repayment and forgiveness strategies. These choices often represent the most significant financial decisions parents make before retirement. PayForED and the advisors featured on our website are trained to support families through these critical planning steps.
