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College
Financial Aid
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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 During June 2003, the New York times reported on some minor modifications in
the way financial aid is calculated which may affect how much your child receives (can be as much as $10,000)
Consult with your school advisor for a detailed update. |
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Financial Aid based on financial need:
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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.
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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
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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
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- 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.
- Under 14 beware of kiddie tax
- Student has control over ugma (uniform gifts to minors) at age 18 unless you
specify (some states the age is 21)
- 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?)
- 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.
- 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.
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Saving funding vehicles to use when saving for a child's college education
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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.
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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)
- 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. American Express has 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
flexibility. Learn How to Save for a Child's education
free of federal tax.
Receive a FREE guide on the tomorrow's scholarSM529 College
Savings Plan. Read 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?
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How much to save for college each month
http://www.finaid.com/ 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
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College Tax Credits:
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The Hope Credit - a tax credit of up to $1650( for 2007) and $1800
(2008) per year per student for at least $2000 in
tuition related expenses paid on the 1st 2 years of post
secondary education.
The Hope Credit helps pay for a two-year degree or certificate program at a
community college, or for the first two years of a four-year program. The
credit covers 100% of the first $1,000 of tuition (2006 $1,100) (but not room, board or
books), plus 50% of the next $1,000 of tuition and other school expenses,
for a total of a $1,500 credit per student. The student must be
enrolled at least half-time.
Lifetime learning-a credit of up
to $1000 per year based on 20% of qualified tuition. This credit isn't limited to college students,
It's available if you're improving your job skills in a
professional course
Both credits are phased out with taxable income for joint
filers in excess of $82,000 ($90,000 for 2006). See your tax advisor.
College-tuition deduction of as much as $4,000 for those
with adjusted gross income under $65,000 for singles and $130,000 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.
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.
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College
Scholarships
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| 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
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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.
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Teaching you child the
college acceptance process at an early age
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| 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.
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Financial Aid and College Resources
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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
http://www.ed.gov/offices/OPE/thinkcollege/early/tce_home.htm
http://www.collegeplan.org
http://www.fastweb.com/
http://www.princetonreview.com/college/college/finance
http://www.studentloanfunding.com/
http://www.collegenet.com/mach25
NJ 529 plan
Franklin Templeton Investments
http://www.hesaa.org/students/nj_colleges/ - NJ
colleges Universities>
Purchase college textbooks online for a discount
http://www.turbotax.com/planning/life_events/education.htm
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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 |
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