Financial Aid. How to save, learn the facts about college financial aid and scholarships. Begin implementing a total strategy now
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College Financial Aid

 

This article simplifies what you need to consider when planning for your child's education.  You should consult with your tax advisor, college planner and your local high school guidance counselor to customize a plan  which works with your income and net worth and incorporates the most recent regulations.  You want to  increase your child's chances of receiving the best financing package available  Consult with your school advisor for a detailed update.  GMail users - if you find this page helpful - please click on the plus one button in the top right corner of this page.... and Tweeters- retweet and Facebook users - tell your friends and Bloggers - link back!  Thanks we appreciate you too!



 

Free Money for College

For Dummies


 

 


 

 

 

 

Financial Aid based on financial need:

Generally available for household incomes under $60,000. Exceptions will apply based on age of senior parent and number of household dependents. Universities and colleges provide grants generally based on financial need. They use their own methodologies for determining who is eligible but gather their data on student and family from the federal financial aid form. So be sure to complete annually regardless of whether you exceed federal limits mentioned previously.

Formula for financial aid calculation:

The federal government's aid application is known as the FAFSA, which stands for Free Application for Federal Student Aid.

Begins with parents income after deducting income and social security taxes paid (less an average allowance between $12,000 to $26,000 dependent upon family size and number of members in college at the same time. Less a small expense allowance for the additional commuting costs of a 2nd wage earner of $2200). 100 % of the remainder (divided by number of students in college) is considered available for tuition costs.

then
Add 50% of the students income over $2200 (less fica and fed taxes)
then

Add 12% of parents gross assets (less an average allowance between $20,000 to $60,000 dependent upon marital status and oldest parents age )

Equity in primary home and retirement assets are not considered part of gross assets. Debt is NOT A REDUCTION in gross assets. Target your home mortgage to be paid in full by the 1st year of your child’s college career. This will free up that monthly amount to use towards education costs offering a “pay as you go” method of funding for school

then
Add 35% of students assets.

When colleges distribute their own financial aid (from endowments) they use the PROFILE application which is based on a formula known as the institutional methodology. Certain schools require financial aid applicants to submit this PROFILE which is maintained by the national nonprofit association called the College Board. For a list of schools who require the profile, click here. The PROFILE often results in a different EFC than the FAFSA because it accounts for assets and income differently. For a list of colleges that require a PROFILE click here. The PROFILE takes a more thorough look at your income and assets to determine what you can pay.  The PROFILE looks at your home equity and retirement assets whereas the FAFSA does not.  The PROFILE will look at what has been saved in sibling accounts. In this way, colleges attempt to target those students with the greatest financial need

A family can estimate what their expected family contribution will be under the federal and institutional methodologies at www.finaid.com and   http://apps.collegeboard.com


How to plan if you believe you will be entitled to some financial aid.

If you believe you may qualify for some aid do the following
  • Save money in the parent's name, not the child's name. Trust funds generally do not sheltering money from the need analysis process and can backfire on you due to the high tax rates.
  • Fund your pension 100% each year, IRA, Simple or other retirement vehicle to the maximum rather than saving for college.  While these assets are not included in the federal need analysis, some colleges do use these assets to measure a family’s ability to pay (See PROFILE list above). Shift retirement money (other than IRA’s and 401K’s) into annuities, since annuities are not included in assets for federal aid purposes.
  • By 12/31/xx of child's junior year at high school payoff home mortgage with all available investment assets. While the federal calculation excludes equity in the home, the institutional methodology system used by many expensive colleges does include equity in the home.
  • Pay off any debt (credit card, car loans etc) with any remaining assets
  • Keep income down in years completing financial aid forms by 12/31/xx of child’s sophomore high school year cashing in investments needed to pay for college that will have taxable gains (stocks, bonds, savings bonds, mutual funds).  While the student is in college, minimize capital gains.  Do not withdraw money from your retirement fund to pay for school. If you must use this money, borrow from your retirement fund.
  • Avoid distributions from IRA’s and pension plans in years completing financial aid forms. Consider withdrawals from these accounts for use in payment of child’s last year of college.
  • Transferring of assets property to relatives to avoid reporting on the financial aid form can be considered fraudulent if you expect to receive the asset or property back at a later date.
  • Consider asking relatives to postpone gifts to help pay for college. This money will reduce financial aid and can be used to pay off student loans after college or the senior year tuition.
  • Call the university and ask to see a copy of how financial aid was distributed last year.
  • A student with savings and investment in their name may  not receive as much aid as the family who kept the assets out of the student's name.  Other than a Coverdell IRA (education IRA's) consider saving  in an account without the students name. Spend down the student's assets and income first. The parents could spend the child's assets on the child's behalf, provided that the expenses are for the child's benefit and not part of the usual parental obligations. For instance, use the child's assets to pay for summer camp but not food, clothing, or rent. A section 529 college savings plan owned by a parent has minimal impact on financial aid, and one owned by a grandparent has no impact on financial aid.
  • Complete financial aid form to receive loans for education. Loans bear maximum interest rates and some loan attributes might include:
    • Interest payable immediately - not deferred until after graduation
    • Loan in parents name
    • No need to prove ability to repay
    • Credit based on child’s credit not parents
    • Accelerate necessary expenses, to reduce available cash. For example, if you need a new car or computer, buy it before you file the FAFSA. Certain types of property, such as automobiles, computers, boats, furniture, appliances, books, clothing and school supplies, do not count as assets. If you will need to make certain major purchases, such as buying a new car, do it by the base year so that your liquid assets are reduced. Choose the date to submit the FAFSA carefully, as assets and marital status are specified as of the application date.
    • If  your family's financial circumstances are unusual, make an appointment with the financial aid administrator at the college to review your case. Sometimes the school will be able to adjust your financial aid package to compensate using a process known as Professional Judgment
College Scholarship Fraud

Don't become a victim by sending  money ($50-$200) to organizations that claim to have access to all the scholarship money or guarantee inside connections with philanthropic groups.  There are hundreds of companies that make promises that have no ability to follow through.  Visit the U.S. Federal Trade Commission's scholarship fraud site for information for Students and Parents. The FTC cautions students to look for tell tale lines:

"The scholarship is guaranteed or your money back."
"You can't get this information anywhere else."
"I just need your credit card or bank account number to hold this scholarship."
"We'll do all the work."
"The scholarship will cost some money."
"You've been selected by a 'national foundation' to receive a scholarship" or "You're a finalist" in a contest you never entered.


Saving for a child’s college education in child's name

  1. Don't do it. And if you have done so to save taxes, the parents could spend the child's assets on the child's behalf, provided that the expenses are for the child's benefit and not part of the usual parental obligations.
  2. Under 14 beware of kiddie tax
  3. Student has control over ugma (uniform gifts to minors) at age 18 unless you specify (some states the age is 21)
  4. Use of series EE bonds. Can defer recognition of interest income until the child is age 14. Can be kept at grandparents home to keep out of control of teenagers but Warning- for the $10000 exclusion to apply, the child must be aware that a gift was made ( but who is going to tell?)
  5. Wealthy relative? If relative pays the tuition directly to the college, it is not considered a gift.  Can be used only for tuition, not room and board. Does not utilize the $10000 exclusion or lifetime exclusion credit.
  6. As mentioned above, a student with savings and investment in their name may  not receive as much aid as the family who kept the assets out of the student's name.  Other than Coverdell (education IRA's) IRA's consider saving  in an account without the students name.


Saving funding vehicles to use when saving for a child's college education

IRA’s

Fund an Coverdell education savings accounts (formerly Education IRAs)  $2,000 educational IRA each year. The amount is not deductible but the earnings and principle may be withdrawn tax free.  Contributions are limited to Adjusted gross income (joint filers phase out is from $190,000 -$220,000 for 20002. Single filers is 1/2 this amount.) A new provision allows entities such as corporations and tax exempt organizations to offer Education IRA's. Contributions are permitted to both the 529 plans and the Coverdell IRA's during the same year. The deadline for contributions is April 15th.. Use in final year of college for tuition to maximize tax exempt growth. If possible, transfer to younger siblings and use for their final year of school to add bang to this small bowl of punch!

For the self-employed-employ your kids (Schedule C filer pays kids a wage which is exempt from social security taxes- until child is 18- don't forget to file payroll tax returns) and fund $2000 per year into a Roth IRA.  The money may be withdrawn for higher education expenses without penalty tax (10%).  Remember, since the child does not reach age 59 1/2 when $ is withdrawn,  tax must be paid on the portion  attributable to growth from income.  While taxes are not permanently avoided as in the Coverdell IRA, the investment may grow tax free until needed for college. 
 

Is Qualified Tuition Programs (QTP)- 529 plan a good choice as a savings vehicle?

What is a Qualified Tuition Program?

A Qualified Tuition Program must meet the following criteria:
  • Tuition payments and contributions to the account cash contributions only; (no stock may be contributed)
    for 2009 and 2010 , qualified higher education expenses included computer technology and equipment but for 2011 withdrawals used to pay technology expenses are not tax free. Room an board for students who are enrolled at least 1/2 time are considered qualified education expense.
  • separate accounting for each beneficiary;
  • no investment direction permitted by contributor or beneficiary (can select from different investment strategies designed by the plan);
  • no pledging as collateral for a loan;
  • prohibition on excess contributions - amounts more than what is reasonably necessary to pay for qualified higher education expenses for the beneficiary. (5 years of tuition, fees, room & board of undergraduate studies at the highest cost institution allowed by the 529 plan.
  • prepaid tuition plan sponsors no longer limited to states;
  • and reporting to IRS and beneficiaries contributions and distributions..

Amounts contributed are not deductible but withdrawals used to pay for qualified education expenses are exempt from income tax.    Accounts may be rolled over from one State's QTP to another's, as well as transfers between a prepaid tuition program and a savings program maintained by the same state, and between a state plan and a private prepaid tuition program. Directing investments in a QTP is prohibited.  Click on this link for a nice write up on Education savings options. For several years now  it is possible to save for your child's education free of federal tax, giving investors in Section 529 college savings plans greater tax advantages and flexibilityRead another good article on 529 plans  at collegeboard.com.

One of the considerations of funding a 529 plan is how these plans performed as compared with other investments. Plans are sponsored by each state and some states have signed up more than one investment firm to sponsor them. Click for list of all 52 states available plans and their performance history .  529 plans allow earnings to grow free of federal taxes. Withdrawals from 529 account earnings aren't subject to federal taxes as long as they are used for tuition, books or other higher education expenses.  Investors who invest in a 529 plan that is not their home state plan, will not receive the state tax incentives that come with the plan. Some states offer tax incentives for residents to invest in their 529 plans, either making contributions tax deductible or exempting earnings from state taxes. The federal tax exemption is  authorized  only through 2010, but many financial advisers expect the benefit to be extended. Withdrawals of earnings from 529 accounts for non-college purposes are taxed at normal rates plus a 10 percent penalty tax.

Also, with the 2003 tax act change, advantages of "529 Plans" may be lost in higher costs (Most 529 plans charge annual fees for maintaining accounts under a certain size, but most also waive the fees if you contribute a minimum amount monthly or quarterly), complicated restrictions and risky "tax-traps." . The 15% tax rate on dividends and capital gains really reduces the "tax-free" advantage of costly and restrictive 529 plans. You may still benefit from 529 plans in certain circumstances. For example, some states offer a state tax deduction for contributions to 529 plans, but many  may be better off with a conservatively managed portfolio of dividend paying stocks held in a simple trust or custodial account. 

Wealthy individuals can reduce their estate tax burden by opening 529 accounts for their children and grandchildren. While gifts to individuals are normally limited to $11,000 annually, 529 rules permit a donation up to five times the annual exclusion amount in the year of contribution (accelerating the next 4 years gift exclusion to the current year) without incurring gift tax or generation-skipping tax, thereby increasing tax-free compounding. Any gifts made to the beneficiary in the following four years will be subject to gift tax.  In 2004 the annual gift exclusion is $11,000 That means a husband and wife can make a lump sum gift of up to $110,000 into a child's or grandchild's 529 plan.  The contributor retains the right to revoke the gift and revest the account to the contributor (subject to income tax on earnings portion and a 10% penalty) and retains the right to change the beneficiary to a new beneficiary selected by the contributor.  Still, with these special rights, the 529 is generally not included in the contributor's estate. (Unless death occurs within the first 5 years of death when the accelerated gift tax exclusion was used to fund the 529 plan).

Also, with 529 plans, "you don't relinquish control at the age of majority".  Children reaching age 21 do not get access to these funds. If they choose not to attend college,  account must be used by  a member of the designated beneficiary's family (which includes first cousins). Or, the balance is distributed to the contributor and the earnings portion of the excess funds will be subject to income tax and an additional ten percent federal tax. If the beneficiary dies while there are still funds in the 529 plan for his/her benefit, the funds are included in the taxable estate of the beneficiary.   Since section 529 college savings plans are counted as an asset of the account owner, if neither the parent nor the student is the account owner, it is not reported on the FAFSA (financial aid application). For example, if the section 529 college savings plan is owned by the child's grandparent, it is not reported on the FAFSA

Some colleges offer a prepaid tuition plan, locking in tuition rates at current prices for future students. The prepaid tuition plans offer big challenges. They put the responsibility for investing wisely on the states. They are based on the premise investment earnings will grow faster than college costs, a supposition that has been sorely tested in recent years. Therefore, some states are putting tighter restrictions on their prepaid plans, some are considering assessing premiums, which could increase tuition costs significantly.

Remember, the college will count  the 529 plan money against eligibility for financial aid.  As a general rule of thumb, save for college in a taxable account in the parents name if the household income is below $100,000. Below this level of income it is possible the child may qualify for some financial aid.  If the household income is above $100,000 and will remain at or above that level when your child enters college, opening and maintaining a 529 plan is a great way to save. 

How to choose a 529 plan
Research these features of the plan before making a choice:

Who can open the 529 account?
Who qualifies as an eligible beneficiary (plan imposed restrictions)?
Is there an age requirements for the account owner or beneficiary?
Can the account beneficiary be changed? Any fees for making the change?
Is the plan available to residents in my state?
At what schools may withdrawals be used? Will full expenses be covered at these institutions or is there an upper limit?
Do I have to name a specific school at the time I contribute to the account?
If the plan is school-specific, what happens if the student decides to attend a different school or isn't admitted by the school?
Are prepaid tuition benefits guaranteed by the state?
How are prepaid plan benefits indexed to tuition inflation? Are they guaranteed to equal actual tuition increases, the state average increase, or a projected increase?
Are there any minimum contribution requirements?
What is the past  performance of the investment options in the plan?
Does my state offer any tax advantages for either contributions made to the account or withdrawals from the account?
Is there a limit on how frequently I can contribute to the account
is there a limit to how much I can contribute annually to the account?
Is their a lifetime maximum amount that I can contribute to the account?
What are the qualifying education expenses covered by plan distributions?
What is the refund policy?
Are there special incentives for state residents?
What are the annual or account fees?
Is there an account minimum that must be maintained to avoid certain fees?
Can I purchase the plan directly from the state or plan sponsor, or must it be purchased through a broker-dealer?
If I buy the plan through a broker-dealer, will the broker- dealer impose any additional fees in connection with opening the account?
How can I change where the money is invested?
If I consult with a financial advisor, what relationship, if any, does that adviser have with the plan he or she is recommending?
What are the investment options are offered?
What are the financial risks associated with each of the investment options?
Are any of the investment options "age-based" such that the portfolio will be automatically adjusted as the beneficiary gets older?
Does the plan limit how soon I can begin taking withdrawals from the account?
Does the plan impose any penalties for withdrawals from the account or impose any account termination fees?
What customer service does the plan provide (toll-free phone numbers, online account information, regular bulletins or mailings)?
What happens to existing investments and future investments if the investment manager is changed by the state?
What if my child does not pursue a post-secondary education?


How much to save for college each month

http://www.finaid.org/ has a college cost projector available to estimate future costs using current tuition rates, an estimated after-tax rate of return and number of years until enrollment. Using a present value calculation, a monthly funding rate should be determined. Fund monthly, history shows the largest returns are from periodic investment

 

 


College Tax Credits:

For each student - you can elect only one of the credits

The American Opportunity Credit
- initially  scheduled to expire in 2010, but was extended for two years by the Job creation act of 2010.  This is a  tax credit of up to $2500 per year per student -  rebate up to 100% of the first $2000 in college expenses and 25% of then next $2,000 college expenses.  Can only be claimed for the same student for a total of four years.  Credit can be deducted from your total tax expense, and if the credit is greater than the tax expense, you can receive a refund of up to $1,000.

In years 2011 and 2012, the credit is phased out with taxable income for single filers with income below $80,000 and joint filers with income below $160,000. See your tax advisor.

Lifetime learning-a credit of up to $2000 per year per family based on 20% of qualified college and graduate education, and job skills courses  and does not require a minimum level of enrollment. This credit isn't limited to college students, It's available if you're improving your job skills in a professional course No limit on the number of years this credit can be claimed. 

In years 2011 the credit cannot be claimed if the taxpayers modified adjusted gross income is $51,000 or $102,000 for married couples filing jointly.  In year 2012 the credit cannot be claimed if the taxpayers modified adjusted gross income is $52,000 or $104,000 for married couples filing jointly

College-tuition deduction of as much as $4,000 for those with adjusted gross income under $80,000 for singles and $160,000 for married couples. If you take this deduction  $4,000 above the line for college tuition , you can't claim a Hope credit or Lifetime Learning credit. 

Qualified education expense include course material, student activity fees, books , supplies, equipment purchases. Room and board, insurance, medical and other personal expenses are not considered qualified education expenses. 
The two tax credits, plus withdrawals from Coverdell IRA's, plus scholarships received may not all be taken in the same year unless, qualified education expenses equal or receive these benefits.


College Scholarships

Merit Scholarships

For students with stellar Grades (top 5% of graduation class) and stellar SAT scores or any student who has above-average talents who is willing to seek out scholarships. Make a list of the students background and accomplishments for use in searching out scholarships. The list should include, State of residence, ethnic heritage, religious affiliations, special aptitudes and abilities, membership in organizations and clubs, school activities, community activities, special interests, special ambitions, career plans, employment background, physical traits or disabilities, parents occupation, employers, affiliations and branch of service. At your guidance counselor’s office search through ExPAN a database of 3300 scholarships.    http://www.fastweb.com/searches 400,000 scholarships.
 

Alternatives

  • Attend community college for 1-2 years
    Co-op programs integrate college courses with paid and supervised work within a field of study 
  • http://www.co-op.edu/ for a list of colleges offering programs
  • ROTC Military
  • Combination undergraduate-graduate degrees can remove 1 full year of tuition.
  • Help your child find a way for your child to be unique. Excel in sports, music, arts, etc.

 


Teaching you child the college acceptance process at an early age

Its not just the money,  the student should be prepared for the acceptance process-

Planning should begins at the end of middle school. Working with  a college planner (advisor) provides your child with the most opportunities and choices.  Planning includes:

  • Upon entry into High School, working with the student to understand how his/her choices will affect his/her options.
  • Teaching the student how to manage the demands of studies, activities, job, and selection of college.  Teach the student  the criteria (field of study, financial considerations) he/she should use in the college search
  • Helping the student discover strengths and interests and translating into the right career choice
  • Learning the ropes of college interviews to gain advantage in the selection process

This site has a terrific newsletter that is chock full of good information. Sign up now.
 


Financial Aid and College Resources

http://www.collegeparents.org/   College Parents of America (CPA) is the only national membership association dedicated to helping parents prepare for and put their children through college more easily, economically and safely.

www.collegeboard.org
ExPan College (at guidance counselor’s office)
www.finaid.com
www.ed.gov
www.collegeplan.org
www.fastweb.com/
www.princetonreview.com/college/college/finance
www.studentloanfunding.com/
www.collegenet.com/mach25
NJ 529 plan  Franklin Templeton Investments
www.hesaa.org
Purchase college textbooks online for a discount

What is the true cost of car ownership? Edmonds has a calculator by car year make model that will help you come to the conclusion - NOT to buy a car for the child entering college!

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IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication