Strategies during a college gap year

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 08/26/20


With many colleges opting solely for an online curriculum, families are facing tough decisions as they determine the value of this altered experience amid rising costs. As a result, some college students are taking a gap year or a semester off from college.

The sudden onset of the pandemic and related lockdowns illustrated how quickly things can change. Many students may want to wait to continue their education when the environment changes.

Several surveys found that many college students are rethinking their plans for the fall. In March, 86% of college students indicated that they planned to return to college. In the same survey repeated three weeks later, that number dropped to 74% (Simpson Scarborough).

The American Council on Education also surveyed more than 2,000 college students in March and April, and found that 13% were either unsure about their plans to re-enroll or have decided not to return to college in the fall.

Planning considerations

While students take a break from college, families can continue to plan for the completion of the college program. Planning is particularly important when students work during the gap year. Additional income can create planning opportunities, but could also have an impact on financial aid eligibility.

Considerations for students who choose to work during the gap period:

  • Additional income may allow the student the flexibility of reducing loans in the future or starting a savings program for graduate school
  • Students may consider an automated savings program directing earnings into a Roth IRA. The Roth provides the ability to pursue long-term investment goals, with the flexibility of tax- and penalty-free withdrawals of contributions. A Roth can also allow students to take advantage of saving while they are in a lower tax bracket and hedge against the threat of higher taxes in the future
  • Be aware of the potential impact on current loans. It is important to check with your loan servicer
    • Loan repayment is typically deferred while in school. In general, loan payments begin six months after leaving school or if the student reduces credit classes to below half-time status
    • Loan servicers may have special repayment programs depending on income
    • If loans can be deferred, be mindful that interest will still accrue
    • Federal relief from student loan payments (temporary cessation of payments and the waiver of all interest on student loans held by the Department of Education) was originally scheduled to expire at the end of September. However, an executive order issued in August extends this deadline to the end of the year. Check with your loan servicer to determine if this provision applies in your situation
  • Check with the college’s financial aid office to determine whether higher levels of income earned during a gap year may negatively impact a future aid award, grants, or scholarships (For example, a student can have roughly $6,600 in work earnings annually before federal financial aid is affected)
  • It’s important to remember that FAFSA (a federal student aid program) looks at income two years prior for the current year.
  •  Income from work study doesn’t count toward the income limit, which means it does not get counted in the expected family contribution calculation
Earn extra credit

Pursuing a work or internship program in the student’s existing field of study can provide valuable experience and perspective that can be helpful when returning to college.

  • Check with the college or university to determine if there is an opportunity to obtain credits for work experience during a gap year
  • Seek opportunities to earn remote credits at another, less expensive institution that may satisfy some standard core requirements. This way, when students return to college, they can spend more time taking courses in their specialty field of study
Review your college plan

Consider meeting with a financial professional to review your current college plan and determine whether making changes can be an advantage to overall saving. Discuss how taking a year off may affect financial strategies in the plan. For example, the students may need transportation during the gap year that would not be necessary if they were living on a college campus. Look at options to cover transportation costs, such as savings in custodial UGMA/UTMA accounts. As a reminder, in order to use funds from a 529 plan, the student must be enrolled in college courses, either full- or part-time.

For more details about financial aid and college savings plans and strategies, read our investor education piece, “Strategies to make the most of college savings.”

In this video, Bill reviews some of the advantages, and planning considerations, for students taking a year off from college.

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