The Best ways to Maximize Post 9-11 G.I. Bill Benefits
This fall, our family will launch our first wingman on a freshman college mission using my Post 9-11 G.I. Bill Benefits. Like many families, we’re excited that she’s launching, so everything else can seem like gravy, but we’ve spent quite a bit of time figuring out how to put the G.I. Bill into action and the best TTPs to maximize the benefits.
Post 9-11 G.I. Bill 101
The interweb is full of information on the G.I. Bill, so we’re going to focus on what military and veteran families need to know, may have forgotten, or could otherwise get tripped up on. Key factors to monitor include:
Transfer of benefits to dependents:
- Must be completed as early as practicable, but not later than losing retainability, and you must serve 4 years of payback prior to using the transferred benefit.
- You must transfer at least one month of benefit to each dependent that you might want to give benefits to, and you can reshuffle the transfer later.
- You cannot initiate the transfer after retirement or separation.
- You can pull the benefits back to yourself if your dependents don’t use them.
- Benefits are for 36 months, which may be more or less than 4 academic years depending on the school(s) where they’re used.
- Most schools give in-state tuition to out-of-state students using G.I. Bill benefits.
The VA’s website is the horse’s mouth for the G.I. Bill, but many excellent bloggers have written extensively on the G.I. Bill too including:
When your kids are young, you can’t really start inking a plan for who will use the G.I. Bill versus who needs to get a 1600 on the SAT to get accepted to a school for wayward boys and girls in Colorado. It’s useful to loosely plan that the first child into college should use the G.I. Bill since dependent children must use the benefit by age 26. Be prepared to deviate from that plan as your kids’ plans and aptitudes emerge.
During the college application process, some schools may ask if you plan to use veteran’s benefits to attend the school. My inner cynic says that answering yes indicates to the school that your child is a source of free-flowing VA dollars and might nudge the scales for acceptance. That said, most schools claim that their admissions departments don’t talk to their financial aid departments during the selection process. I’m not so convinced by that claim.
The FAFSA (Free Application for Federal Student Aid) and CSS Profile (College Scholarship Service) may also ask questions related to VA benefits.
While shopping for schools, you can conduct reasonable bar napkin math on how the G.I. Bill benefits will impact costs at each school. Your math should include:
- Current year G.I. Bill maximum tuition coverage of $26,381.37 for 2022. Note that if the cost is less, the VA isn’t going to stroke you a check for the excess.
- Yellow Ribbon Benefits (more on this below)
- Monthly housing stipend (paid only during actual days on campus)
- Mandatory fees (VA does pay these, but it may be hard to know which fees aren’t included)
- Book stipend $1,000 per year
- Rural benefit of $500 for those who have to travel over 500 miles to college from sparsely populated areas
While you can’t initiate the use of G.I. Bill Benefits for Junior until s/he is accepted to and chooses a school, you can verify that the VA system does in fact still show that you have G.I. Bill benefits. Otherwise, the first critical milestone is applying for the Certificate of Eligibility once you’ve placed a deposit with the college.
If the institution accepts the G.I. Bill, it will have a person or office that manages veteran affairs and will be able to provide school-specific guidance on linking the VA and your student’s account.
Because the VA conducts thorough verification that students are registered for full-time schedules, aren’t dropping classes, and are maintaining enrollment, etc., you should expect that VA payments for tuition and fees won’t flow under after the start of classes. Your institution understands this, but it’ll be cold comfort when you’re getting blasted with emails about payment timelines.
Likewise, the housing stipend isn’t going to take a lead turn on your payments for room and board to the school or private off-campus housing. You’ll need to have a plan to afford initial costs for room and board and then expect to pay yourself back as the VA funds flow.
Recall that tuition and fee payments go directly to the school, but the housing and book funds go to the student’s designated checking account. You’ll set up Direct Deposit for those funds after you’ve initiated the Certificate of Eligibility process.
Finally, your student will need to certify to the VA monthly that s/he is still enrolled and entitled to benefits. This is usually accomplished by text or email.
To sum up the key timeline milestones:
- Get accepted to a school and put down a deposit
- Contact the school’s veteran office and comply with their requirements
- Apply for a Certificate of Eligibility from the VA
- Apply for Direct Deposit from the VA
- Plan to pay for initial room, board, and book costs out of pocket
- Expect to wait for the tuition money to flow past the school’s normal deadline for the semester
- Certify school status monthly as required by the VA
G.I. Bill, the Yellow Ribbon Program, and Scholarships
The Yellow Ribbon program is a cooperative program between some schools and the VA. Each school is different in the amount and types of Yellow Ribbon funds it gives out. For example, some schools will cover the difference between the G.I. Bill maximum and the actual tuition cost. In reality, the VA and the school split this amount, but the ultimate result is that hefty tuition bills vanish with the most generous Yellow Ribbon offerings.
Beware however, that some schools are pretty stingy with Yellow Ribbon funds if they offer them at all. It’s not uncommon for schools to limit the number of students, the academic major, or even the school level (graduate versus undergraduate) for their VA funds. This website helps research Yellow Ribbon programs at schools, but when you talk to the school, you may find more up-to-date information.
If Junior earns scholarships from the college or outside institutions, you’ll be at the mercy of the school’s financial aid office when trying to minimize your out-of-pocket cost. One school that my daughter applied to gave her a sizeable scholarship, had minimal Yellow Ribbon benefits, and said that she could use the G.I. Bill or the school’s scholarship, but not both—our family would have to pay a chunky five-figure bill out of pocket each year. We kept shopping. Don’t assume that you’ll be able to layer on every type of money that you have access to. If you’re getting garbled messages from the school’s financial aid office, make sure you’re engaging the veteran affairs office too and vice versa.
G.I. Bill Benefits and 529 College Savings Plans
If your family has access to a 529 College Savings Plan (a 529) and the G.I. Bill, you’ve got some first world problems to solve. Recall the major rules for 529s:
- Contributions are after-tax for federal purposes but may receive a state income tax deduction.
- Growth is tax-free.
- Distributions for qualified educational use are tax-free.
- Distributions for non-qualified educational use incurs both income tax on the growth and an extra 10% penalty tax.
- Distributions for non-qualified educational use made due to receipt of a scholarship (including the G.I. Bill) incur income tax on the growth, but without the 10% penalty tax.
- The beneficiary of a 529 can be changed to other family members (including grandchildren) at any time.
Let’s look at some scenarios:
G.I. Bill Benefits plus Large 529 Balance
Because the G.I. Bill must be used by dependent children before age 26, you probably don’t want to risk not using it, even if it means that you could have left over funds in your 529. Let’s assume that for Junior’s school, the benefit over 4 years is worth $200K and you also have $200K in a 529 plan, $100K of which is growth. Using 100% of the G.I. Bill benefits and $0 of the 529 balance for education costs, leaves $200K (plus ongoing growth?) in the 529.
If you pull out 529 dollars commensurate with G.I. Bill payments, you’ll pay your marginal income tax rate, e.g., 22% or 24%. If hypothetically this all happened in one year, you might pay 24% * $100K (the growth) = $24K to get both $200K of G.I. Bill benefits and $176K of 529 dollars that are now freed up for other uses.
An alternate tactic for this scenario would be to pay for room and board out of the 529 while pocketing the G.I. Bill housing stipend. This would achieve the effect of using 529 dollars for qualified education purposes, i.e., without any income or penalty tax. Those dollars would be replaced into the household with tax-free G.I. Bill housing stipend dollars.
G.I. Bill Benefits plus Modest 529 Balance
Again, the aspirations and aptitudes of your kids will likely determine how you sequence the G.I. Bill, scholarships and 529 funds, but deploying the G.I. Bill first allows more time for 529 dollars to compound. If your roster could fill an EA-6B cockpit, or the ages of your kids aren’t a very tight shot pattern, letting the 529 dollars grow for Tail-End Charlie could maximize the 529 fund.
G.I. Bill Plus No Foreseeable Use for the 529 Funds
Whether your kiddos use the G.I. Bill (again, worth well over six figures) or not, it never expires for you. That said, if you don’t have a reasonable path to spend 529 dollars on qualified educational expenses for current or future family members, you’re stuck paying income tax on the earnings plus the 10% penalty tax.
Currently, there are no provisions for gifting or donating 529 funds outside the family for a tax break. Thus, your best hope for rescuing “stranded” 529 dollars may be to try to create low tax bracket years in early retirement. Viable tactics include delaying civilian pensions and social security, being/staying married, using Roth or high basis taxable dollars for current needs, and lobbying Congress to allow charitable donations of 529 dollars for a tax break.
Flexible State School Plus G.I. Bill Plus 529 Funds
Some schools have become creative with how they allow you to use your G.I. Bill benefits. Schools in one state south of the Mason Dixon may allow you to use only one month of G.I. Bill benefits to get in-state tuition for the entire semester or even year. If a school allows this, it opens the opportunity to peanut-butter-spread the 36 months of G.I. Bill benefits across multiple children (or even degree programs) while stretching the 529 dollars to only cover in-state tuition rates. When shopping for schools, don’t wait until Junior commits to start talking to the veterans’ affairs office to see if they allow this tactic.
Clearly there are more scenarios to consider, but these should give you some ideas for how to manage the interplay between your G.I. Bill benefits and 529 dollars.
Building Wealth with your G.I. Bill Benefits
I’ve written previously about using 529 dollars to pay rent to a property that you (or perhaps an entity that you control) own. The G.I. Bill housing stipend may offer the same benefit.
Imagine that you own a property near the college Junior will attend. Junior’s G.I. Bill housing stipend can be used to pay Junior’s rent on the property. The effect is that you’ll use tax-free income to pay both principal and interest while hopefully building equity on your property. In an expensive market, this could amount to nearly six figures over four years of college.
In reality, since you’re not compelled to use the G.I. Bill housing stipend for actual room and board costs, you can invest it or consume as you see fit. Technically, Junior can blow it on beer, pizza, and Bitcoin if s/he wants to. Technically, you can probably motivate Junior to make better choices…
G.I. Bill Benefits and Tax Credits
The American Opportunity Tax Credit (AOTC) provides tax relief for dollars spent on the first four years of undergraduate tuition. The credit can be worth up to $2,500 off your tax bill and is calculated as 100% of the first $2,000 that you spend and 25% of the next $2,000. I.e., you must spend $4,000 on undergraduate education to get the full benefit. If no tax is actually due, 40% up to $1,000 is refundable.
Recall that tax credits are more beneficial than tax deductions as they directly shrink the tax you pay. In the case of the AOTC, a taxpayer in the 22% bracket would need to skinny down income by $11,363 to get the same tax effect as a $2,500 credit.
The wet blanket of the AOTC is that it phases out for a Modified Adjusted Gross Income (MAGI) from $160K to $180K. Most single income active duty families should be in good shape to claim it, but retirees with higher income post-military jobs alongside military pensions will likely be trapped in the high block above $180K.
For those that will qualify based on the income range, the key requirement is: pay $4,000 out of your own funds not including the G.I. Bill, Yellow Ribbon program, G.I. Bill Housing stipend, or 529 funds. Basically, you can’t double dip with other tax-advantaged sources of funding.
This may not be a fit for every family and the tradeoffs will be different for all but may include:
- Spend $4,000 to achieve the effect of keeping $7,363.
- Spend $4,000 and potentially leave $4,000 trapped in a 529.
- Spend $4,000 and potentially not maximize available scholarships or Yellow Ribbon dollars.
In addition to determining whether it’s worth paying $4,000 for the $2,500 credit, a family needs to be conducting fairly high-fidelity tax projections if the start of the $160K phaseout range is marching down the scope.
The Lifetime Learning Credit is less generous than the AOTC. It’s 20% of tuition expenses up to $10,000 for a maximum of $2,000 per year. It can’t be used simultaneously for the same student in the same year as the AOTC, but it’s not limited to undergraduate schooling. The phaseout range for MAGI is also $160K to $180K in 2022.
The Lifetime Learning Credit is often used for graduate and professional school. If Junior is paying his or her own way at this point, s/he can probably claim the credit on her own taxes. This raises yet another set of tradeoffs:
- Pay for Junior during grad school to get Lifetime Learning Credit versus having Junior pay her own way (this would likely also result in the $500 dependent tax credit).
- Allow Junior to pay his way through grad school to claim the Lifetime Learning Credit only to find out that he doesn’t have enough income to pay any taxes. The credit is not refundable if there is no tax due.
- Execute income suppressing activities to claim $2,000 tax credit only to still have funds trapped inside a 529 account.
The AOTC and Lifetime Learning Credits aren’t chump change for most of us but using them requires planning. Focusing too much on them could result in the tax tail wagging the investment dog, or the education dog, or the income dog… none of which generally ought to be wagged by their tail.
Cleared to Rejoin
The Post 9/11 G.I. Bill benefit is massive at face value and brings hundreds of thousands of dollars of economic value to many active and veteran families. While the program seems straight forward, putting it into action requires planning. Max-performing it requires a lot of lead turns and potentially a lot of tradeoffs between taxes, disposable income, 529 dollars, and each family member’s needs.
If your kiddos will use your G.I. Bill benefits, it’s never too early to start talking to your financial planner about how to get the most bang for every buck.
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