The College Trap

The COLA Trap is real, but the College Trap is worth a lot more. Every retiring O-5+ I’ve ever talked with about military retirement wants to explore Doug Folwer’s outstanding monograph called The COLA Trap. Doug dissects the laws and inflation tendencies that impact how military pension COLAs can vary widely based on what month in a given year we retire. His research determines that getting a little tactical and a little lucky with the right retirement month could create a $100K or more increase in retirement benefits over the 40+ years we might receive our pensions.

A Quick BOFO

It’s a blinding flash of the obvious (BOFO) to point out that our income goes up when we retire from the military because we usually take a job that earns at least our prior gross income, but we also receive a pension and, for readers of this blog, usually VA disability compensation (VACP).

VACP is exceptionally common for retiring aviators because 20+ years of electrons melting your plumbing, G’s grinding your discs into Ritz crackers, plus the normal wear and tear of military service, tend to create chunky medical records. This often translates into VA disability ratings that at least clear the 50% bar and often clock 100%. Starting VACP sooner, specifically as it relates to college funding, can dwarf the benefits of the COLA Trap.

VA Disability Math

Mercifully, I’ll skip a dissection of how the VA math (doesn’t really) math to add together all of our units of battle damage to create a rating. Instead, I’ll show you the money. Recall that, at 50% or higher, you get actual extra tax-free money each month. Below 50%, the VACP just becomes a tax-free portion of your pension.

I don’t see too many bag-wearers below 50%, so let’s assume that as a floor.

Depending on the number of wingmen you and your spouse cocreated, your 2025 annual VACP might be as low as $13K for a single veteran at 50% to as high as $56K for a married vet with four kids rated 100%. With more kids and dependent parents, it could be higher.

VA Disability Afterburner

For veterans rated 100% “Permanent and Totally Disabled,” there are a few extra stages of financial afterburner available in the form of Chapter 35 DEA (Dependents Educational Assistance) benefits. Think of Chapter 35 benefits as “Belt-fed GI Bill-lite.” Rolls right off the tongue, I know.

For qualified vets, Chapter 35 pays about $13K of tax-free cash per year to your dependents while enrolled full-time at college (or grad school). Like the Post-9/11 GI Bill, this benefit is for 36 months. However, unlike the Post-9/11 benefit, Chapter 35 is for each kiddo and your spouse. Furthermore, per the Veterans Choice Act, it unlocks in-state tuition.

Chapter 35 benefits have more devilish details, including the potential for some benefits at the end of high school, but let’s assume $13K tax-free per year plus in-state tuition as the main benefit here. Keep in mind that your kids can’t use the Chapter 35 and Post-9/11 benefits at the same time, but could use them in sequence.

Some states, such as Virginia, offer generous college benefits starting at the 90% rating, so it’s worth researching your post-military state of residence and its requirements when planning college costs.

Finally, many states exempt veterans from some or all property taxes. Texas gives 100% relief of its onerous rates to 100% disabled veterans, as does Florida. Let’s call that another $7K to $10K minimum.

The College Trap in Action

Let’s assume a 20-year O-5, callsign McLovin, earning $175K in total compensation, whose pension would be $65K (taxable). McLovin’s 3 kids will be entering college in the next few years, and he expects to earn $175K at his post-military job if he retires.

Let’s also assume a pretty tight mil-dispersion on his little wingmen, such that one will start college every two years and so the college years overlap for a total of 8. Let’s also assume that McLovin retired in Florida, but the kiddos Jedi mind-tricked him into pricey out-of-state schools.

If McLovin stays on active duty through the college years, college funding most likely comes from Post-9/11 benefits, 529 savings, loans, scrimping, and scholarships. There’s nothing wrong with this, and I’d say it’s awfully close to the center of the bell curve. It’s a fair assumption that the per-year cost of out-of-state school will be $60K to $80K all-in, so we’ll round to $70K or $280K over 4 years, not counting inflation. This balloons to $840K for the 3-ship, perhaps only $560K if one kiddo uses the Post-9/11 GI Bill.

McLovin’s squadron-mate STOIKY, (Stop Talking Or I’ll Kill You) looks the same on paper with 20-year, a spouse and 3 loving little financial vampire squids to send to college. STOIKY retires to a $175K annual civilian salary a couple of years before he launches the first wingman to college. STOIKY has a 100% VA rating.

STOIKY gets some serious tailwinds:

Property Tax Exemption: $8K
Pension: $65K
Chapter 35 annual cash: $13K per kid per year. Because this is tax-free, it’s equivalent to $17K pre-tax in the 24% bracket.
VACP: $56K per year tax-free. ($73.6K taxable equivalent).
In-state Tuition Discount: $25K per year, or $100K per child over 4 years.

Assuming one kid uses the Post-9/11 GI Bill, STOIKY’s college tailwind from retiring before his 3 kids start the 8-year college period looks like:

$64K (property tax) + $520K (pension) +$104K (Chapter 35 cash) + $448K (VACP) + $200K (in-state tuition) = $1.3M during the college years.

That’s about $160K per year of extra college funding firepower from retiring and getting VACP, a pension, and other potential benefits in place before the college years. This might be considered a best-case scenario, but you can imagine that just starting the pension plus a modest VA rating still creates a lot of extra breathing room to afford college.

Cleared to Rejoin

The COLA Trap suggests we hope for the right month to maybe squeeze $100K out of 40 years ($2.5K per year). The College Trap suggests we hope for a high VA rating and get it started before college to squeeze as much as $160K+ PER YEAR during the college years.

McLovin and STOIKY have a $1.8M+ delta in their college-funding posture, but not everyone will ring the bell at a 100% VA rating. Ultimately, there’s a big gamble on what your VA rating will be, but you can’t know until you retire. In my experience, 20 years results in a lot of deferred maintenance and battle damage, so it’s not unreasonable to plan on a fairly high rating, if not 100%.

I’ll be the last to suggest that our nation’s finest race to the exit just to opportunistically grab government dollars for college. However, realistically, many of us face the retirement dilemma in our final years in the military as our families tire of PCS-ing and crave stability. If you’re considering retiring anyway, and you’re stressed about paying for college, consider the College Trap. It could cost you way more than the COLA Trap, and you might benefit from both.

Fight’s On!

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