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If you’re planning to shoulder all or some of the cost of your child’s college education, you’re giving your child a wonderful gift. And that’s just how the Internal Revenue Service (IRS) sees it — as a gift. Depending on the amount you offer, and whether you give it directly to your child or to the school, you could get hit with an additional expense, known as the gift tax.

Whenever you give someone money that is a gift, you automatically become subject to the gift tax. Whether you actually need to pay that tax, however, will depend on the size of the gift and what it was used for. Here are some things to keep in mind if you want to give your child money for college but avoid getting hit with any additional taxes.

What Is the Gift Tax?

According to the Internal Revenue Service (IRS) , the gift tax is “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.”

That’s a lot of words to essentially mean that if you give someone a gift of property, including money, without getting something of equal value in return, that may be considered a gift. And if you’re gifting, it might be subject to the gift tax. In general, the gifter is responsible for paying the gift tax costs .

Before you start worrying if you’ll have to pay a gift tax on the $100 bill you slipped into your niece’s graduation card, it is important to know that the gift tax generally only affects large gifts.

This is because there is an “annual exclusion” for the gift tax, which means that gifts up to a certain amount are not subject to the gift tax. For 2023, the annual exclusion is $17,000; for 2024, it’s $18,000. If you and your spouse both gift money to your child, the annual exclusion is $34,000 in 2023, and $36,000 in 2024.


💡 Quick Tip: You’ll make no payments on some private student loans for six months after graduation.

Gifting Your Money Directly to Your Children

Children are not treated differently when it comes to the gift tax, which means that whether you’re gifting your neighbor money for being really great all those years, or transferring $20K to your son’s bank account to help him pay for college, the gifts are treated in the same way by the tax code.

This means that a gift you make to your child for the purpose of paying tuition or covering educational expenses may be subject to the gift tax if the gift exceeds $18,000 in 2024 (if you’re single) or $36,000 (if you’re married and making a joint gift).

With the average cost of attendance at a private university now exceeding $55,000 per academic year, it’s conceivable that you would end up giving your child a cash gift that exceeds the annual gift tax exemption.

One way around this is to gradually put money aside every year in a 529 account. Gifters can contribute up to $18,000 in 2024 to a 529 account per person, per year with no risk of getting hit with a gift tax. That means a married couple could gift up to $36,000 per account, per year in 2024 without having to pay a gift tax.

Recommended: Paying for College: A Parent’s Guide

Paying College Expenses Directly

In addition to the annual exclusion limit, the IRS also waives the gift tax for gifts that are used to pay tuition expenses. There’s no limit on how much you can pay but the caveat is that you have to give the money directly to your student’s school. Otherwise, any amount over the annual exclusion limit will be subject to the gift tax.

This means that, in some cases, it may save you some cash to pay the school directly rather than first giving the money to your child and having them use it for tuition. It is important to consider all your options, however, as gift tuition payments may impact the student’s need-based aid.

Other Ways to Pay for College

If you don’t have enough savings, or would rather not deplete your savings to pay for your child’s tuition and expenses, here are some other ways to help your child cover the cost of college.

Help Your Student Complete the FAFSA

Submitting the Free Application for Federal Student Aid (FAFSA) is a critical step when it comes to getting federal student aid. While the FAFSA is the student’s responsibility, when a student is considered a dependent student for FAFSA purposes, parents have a large role in the application process. As a result, you as a parent can help make the process faster and easier.

The FAFSA is a gateway to several forms of financial aid, including grants, scholarships, work-study, and federal student loans, so it’s worth filling out even if you don’t think you will qualify for aid. Many colleges also use the FAFSA when awarding institutional (merit-based) aid and some states use the form for certain state-based aid.

Take Out a Parent Loan

If your student has a gap in funding after tapping financial aid, including federal student loans, you might next look into parent student loans. You have two options: Parent PLUS Loans and private student loans. The best one for your situation generally depends on your credit history.

Here’s what to consider when looking at Parent PLUS Loans vs. private student loans.

Parent PLUS Loans

With Parent PLUS Loans, you can borrow up to the cost of the child’s attendance each year, minus any financial assistance that has been awarded, with no limit on the amount borrowed. This is true regardless of the parent’s income.

For Parent PLUS Loans first disbursed on or after July 1, 2023, and before July 1, 2024, the interest rate is 8.05%, which is higher than most other federal student loans. There is also a loan fee of 4.228%. As federal loans, however, Parent PLUS loans have access to multiple government-sponsored repayment plans and forgiveness programs.

Parent PLUS loans are not subsidized, so interest begins to accrue on the outstanding loan balance as soon as funds are disbursed and continues to accrue even if you choose to defer making payments on the loan until after your child graduate’s college.

Recommended: What Percentage of Parents Pay for College?

Private Student Loan for Parents

If you have good or excellent credit, you may be able to qualify for a private student loan for parents that has a lower interest rate than a Parent Plus Loan. Depending on your credit, you could potentially see a difference of 2% or more. Over the course of a 10-year repayment period, that lower interest rate can add up to significant savings. Keep in mind, though, that private loans do not offer the same protections and benefits that automatically come federal education loans.

If you’re considering private student loans, be sure to check your rates with multiple lenders to find the right loan for you. You can typically browse rates without any impact to your credit score (prequalification generally involves a soft credit check).


💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.

The Takeaway

Paying for your child’s college education is considered a gift in the eyes of the IRS. However, parents can give up to $18,000 in cash to a child individually and $36,000 jointly in 2024 without getting hit with a gift tax. Parents can also pay for tuition directly to the college to avoid getting hit with a gift tax, with no upper limits.

You can reduce how much you’ll need to chip in for your child’s college expenses by helping your student fill out the FAFSA. This will give them access to scholarships, grants, work study, and federal student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


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One critical step for creating financial security is establishing a financial plan. A well-crafted financial plan can help you achieve your goals, like buying a house, crushing your debt, or saving for retirement. Knowing that you’re prepared financially to face what’s ahead can help create peace of mind.

A solid financial plan will be different for everyone, but there are a few cornerstones to consider as you build your personal financial road map.

6 Steps To Creating a Financial Plan

A financial plan is not just another word for budget or debt-reduction plan. It’s the long-term roadmap that could help make your vision for the future a reality. The smaller pieces, like budgets and debt-payoff strategies, are tools to help you get there.

And whether you sit down with a financial planner or do it yourself, the act of writing down not only what you want, but how you plan to get it, could help take it out of your head and make it real.

While the idea of coming up with an overall financial plan for yourself might seem overwhelming, you can make the process manageable by breaking it down into these six basic steps.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

1. Setting Your Goals

While everyone’s financial goals will be different based on their individual situation, these are some common goals that tend to rise to the top of the list:

•   Having an emergency fund. Generally, you’ll want to have to have at least three to six months worth of living expenses set aside in an emergency savings account. (If you’re self-employed or your income fluctuates, you might aim for six to 12 month’s worth of expenses.) This can be used to cover those unexpected expenses that invariably pop up, or float you through a loss of income, without wrecking your plan.

•   Growing your 401(k) or other retirement accounts. If your employer offers a matching contribution, consider contributing at least 100% of what they’ll match. Combine that with the magic of compound interest, and you could see your balance grow at a nice pace.

•   Eliminating high-interest debt. It’s no secret that eliminating your credit card debt could not only save you a significant sum in the long run but also help improve your credit profile.

While those three objectives often top the list, here are some other goals you may want to include in your financial plan:

•   Establishing (and maintaining) good credit. If your dreams include large purchases, or even starting a small business, a bad credit score can be a deal-breaker. Generally, the minimum number needed to buy a home is 620 for a conventional loan. (If you’re struggling with bad credit, there are strategies that could help you build your credit profile.)

•   Paying off your student loans. If this is one of your financial goals, you’re in good company — more than 43 million Americans currently carry student loan debt. And while a student loan is generally considered “good” debt, it still accrues interest.

•   Living within your means. Ideally, you don’t want to put anything on your credit card that you can’t pay off in full at the end of the month (or relatively soon thereafter), since this is an expensive form of debt.

•   Saving for your kids’ education. No one can predict what the higher-ed landscape will look like when your kids are ready to start filling out applications. But we do know that the average cost for tuition and living expenses in the U.S. is $36,436 per student per year, and that costs have had an annual growth rate of 2% over the past 10 year.

•   Growing your investment portfolio. This might include items like your 401(k) or individual retirement account (IRA), but it can also mean a foray into the world of stocks and mutual funds. Becoming a smart investor can not only be a goal by itself, but one avenue to achieving other financial goals.

The goals that you choose as part of your financial plan may be on vastly different timelines, and you may need to accomplish one before you can move on to another. It can help to group financial goals into categories based on their time horizon — short term, mid-term, and long-term goals.

2. Understanding Your Resources

Knowing exactly what you have to work with might be one of the most important keys to building a plan that works. To put the entire puzzle together, though, you’ll need to find all the pieces.

One way to get started is to gather up all your paper and electronic bank statements, billing accounts, and portfolio documents. This might include:

Income: Salary, investment income, alimony
Expenses: Bank statements reflecting withdrawals or other debits, monthly billing statements, and other sources of everyday spending
Assets: Savings accounts, home equity, or physical items you own (car, collectibles, etc.)
Liabilities: Credit card debt, student loans, mortgage(s), and any other sources of debt

Next, you can use these documents to calculate your net worth. While you may not think you have much or any net worth, this is a worthwhile exercise because it establishes a baseline you can later use to measure growth in your net worth over time.

To create a net worth statement, simply list all of your assets (such as bank and investment accounts, real estate, valuable personal property) and then all your debts (like credit cards, mortgages, student loans). Your assets minus your liabilities equals your net worth.

If you find that your liabilities exceed your assets, don’t panic. This is a common scenario when you’re just starting out, particularly if you have a mortgage and student loans. With a financial plan in place, your net worth should grow over time.

3. Analyzing Monthly Cash Flow

Next, it’s a good idea to get a sense of your monthly cash flow — what’s coming in and what’s going out. You can use your bank statements from the last three or so months to come up with an average cash inflow and outflow.

If you find that your monthly outflow equals your monthly inflow (i.e., you’re not saving anything) or your outflow actually exceeds your inflow (meaning you’re living beyond your means), you’ll want to drill further down into the outflow column.

Start by making a list of all your spending categories and the average you spend on each per month. Then divide the list into two main categories: essential spending (e.g., rent/mortgage, utilities, groceries, insurance, debt payments) and non-essential spending (such as entertainment, shopping, travel, clothing). This exercise may immediately reveal some simple ways to reduce spending and expenses.

4. Updating Your Budget

While a budget sounds restrictive, it’s really nothing more than a plan to make sure that your spending aligns with your priorities. There are all different kinds of budgets but one simple approach is the 50/30/20 rule. To use this rule, you divide your after-tax income into three categories:

•   Needs (50%)

•   Wants (30%)

•   Savings and debt repayment beyond the minimum (20%)

If you found (in the above step) that your outflow equals or exceeds your monthly inflow, you’ll want to take a closer look at your non-essential spending list and look for places to cut. Every dollar your free up can then be diverted into saving for your short- and long-term goals.

💡 Quick Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

5. Tackling High-Interest Debt

Getting out from under high-interest debt (such as credit card balances, payday loans, or rent-to-own payments) is an important part of any financial plan.

There are several ways to go about paying down debt. With the ​​avalanche method, for example, you list your debts from the highest interest rate to the lowest. You then throw all of your extra cash to the highest interest debt while continuing to make the minimum monthly payment on the others. Once you’ve paid off the highest interest debt, you move on to the next-highest interest debt, and so on.

With the snowball method, you list your debts from smallest to largest based on balance size. You then put all your extra cash toward the debt with the smallest balance, while making the minimum monthly payment on the others. When that is paid off, you move on the next-smallest debt, and so on. This approach can help you stay motivated by achieving early wins.

You might also consider debt consolidation, which involves transferring your credit card debt to a balance transfer card or personal loan with a lower interest rate — allowing you to focus on just one monthly payment.

6. Investing in Your Future

Once you have a solid emergency fund in place and expensive debt under control, you can start focusing on ways to grow your wealth over time.

While you may think of investing as something for rich people, investing can be as simple as putting money in a 401(k) and as easy as opening a brokerage account (many have no minimum to get started).

Part of your financial plan might include increasing your contributions to your retirement accounts. You might also look at allocating any other available income to a taxable investment account that can add to your net worth over time. Your plan for investing should take into account your investment risk tolerance and future income needs.

Recommended: Investing for Beginners: Considerations and Ways to Get Started

Monitoring and Reviewing

It’s been a few months since you implemented your financial plan, and so far, so good. But things may have changed a bit.

You paid off one credit card, so you need to reallocate that payment to the next debt. Or, a goal that used to be at the top of your list isn’t so important any more.

Reviewing your plan can mean not only making adjustments, but simplifying. This can include automating any new payments, consolidating new debts, or opting out of paper statements to reduce clutter.

Are There Any Downsides To Creating a Financial Plan?

Financial planning can help you feel more confident and in control over your personal finances. But it does come with a few downsides. Here are some to keep in mind:

•   It can be time-consuming. The process of going through your finances and understanding your income, expenses, and savings takes time, effort, and patience. It can also take some time to see tangible results of your efforts.

•   Financial predictions may not come to pass. You may set financial goals based on how much you expect to earn in a high-yield savings or an investment account. However, interest rates and investment returns are subject to conditions you can’t control or always predict.

•   It’s not one and done. It is not enough to make a financial plan and stick with it. It’s important to keep track of your progress and regularly reassess and adjust your plan as your financial situation, your goals, and market conditions change over time.

Is Creating a Financial Plan Viable for Everyone?

Yes. Financial planning is a tool that anyone can use, regardless of age, income, net worth, or financial goals. While it sounds fancy, financial planning is simply a way to document your personal and financial goals, come up with a plan to reach those goals, and make sure you stay on track to meet those goals.

What’s more, you can create a financial plan at any time, whether you’ve just started working or have been part of the workforce for years. You can hire a professional financial planner to help, or you can write a financial plan yourself (with the help of the steps listed above.)

The Takeaway

Creating a financial plan is an important step toward financial security. To get started with your personal financial plan, you’ll want to prioritize your financial goals, review your current income and spending, and then analyze and make changes in a way that will help you meet the financial goals you set.

Keep in mind that a financial plan isn’t set in stone. As your life changes, you’ll want to adjust your financial plan to fit your needs.

Having the right accounts in place can go a long way toward helping you achieve your financial goals.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How do you write a financial plan?

You can enlist the help of a professional financial planner or write a financial plan yourself. Generally, the first step is to write down your financial goals, assess your net worth. and identify your spending habits. From there, you can come up with a spending, saving, and debt reduction plan that will help you achieve your goals and build your future financial security.

What are the components of a financial plan?

A financial plan can be customized to your individual needs, but generally includes the following components:

•   Financial goals (short-, medium-, and long-term)

•   Statement of net worth

•   Cash flow analysis

•   Monthly spending budget

•   Debt repayment plan

•   Retirement savings plan

•   Investment plan for other goals

What are examples of financial plans?

There are many different types of financial plans, and you don’t need to do them all at once. Some examples include:

•   Cash flow planning and budgeting This involves looking at how much money you have coming in and going out and establishing a plan as to how you will spend your money each month.

•   Insurance planning This assesses your risk exposure and develops strategies to protect against those risks.

•   Retirement planning This aims to calculate how much money you will need in your retirement fund to live comfortably after you retire.

•   Investment planning This involves looking at all of your future goals, such as purchasing a house, sending kids to college, and retirement, and coming up with a savings and investing plan to meet those goals.

•   Tax planning This looks at ways to reduce your income taxes with tax deductions, tax credits, and any other opportunities that are available to taxpayers.

•   Estate planning This involves making arrangements for the benefit and protection of your heirs.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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