To ensure their children’s success in today’s intensively competitive world, parents are faced with the absolute necessity of paying for a college education. As students approach the high school years, it is understandable why so many parents feel the stress to financially prepare for tuition and related costs as they have not only gone through the roof already (Boston Univ., $51,000+), but continue to increase as much as 15% ever year! With no relief in sight, how can a college or college-bound family survive?
Contrary to popular belief, much of the anticipated debt can be legally eliminated if the appropriate action is taken at the proper time and before it is too late. Help is on the way in the form of proven financial strategies that make virtually any college affordable.
For example, most families are unaware of the fact that students have no asset protection allowance in the financial aid formulas. For college year 2007-2008, students will lose 20% of every dollar they have in cash, savings UGMA & UTMA accounts, stocks, bonds, savings bonds, mutual funds, and the like.
Parent assets are subject to a different formula and school selection is a key factor in ultimately determining the amount of financial aid. There are two categories of schools:
Category 1 includes a few select state colleges plus approximately 225 elite private schools. In addition to the Free Application for Federal Student Aid, (commonly known as the FAFSA), they also require the CSS Financial Aid Profile (FAP).
Those who find the FAFSA difficult will undoubtedly regard the FAP as a nightmare, and pity the poor family who’s divorced, separated, or owns a business or a farm. Such families are required to complete an additional form, The Business/Farm Supplement (you’ll need your accountant), and/or The Noncustodial Parent’s Statement (be nice to your ex). These colleges take into account all of the above plus home equity, Coverdell Education Savings Accounts (Education IRA’s), the refund value of Prepaid Tuition Plans and 529 Savings Plans.
Category 2 schools (all the rest), only require the FAFSA and exclude the value of the primary residence or a farm, provided the family lives on it.
Parent assets are subject to a 5.6% annual assessment over their allowance, which increases with age. The asset protection allowance for a two parent family with an older parent of 48, is $45,000. A 45 year old single parent is only allowed $19,700.
While this is certainly cause for concern, it is not cause for alarm. The good news is that with proper asset repositioning, parents and their students can appear penniless in the blink of a financial aid officer’s eye by legally repositioning their money into financial vehicles excluded from the calculations.
Once accomplished, repositioning makes it possible for families with students already in college to re-file their financial aid forms and qualify for additional aid for each of the ensuing years.
Note: Even more money can be saved when implementing income planning strategies. As the formula for parent income is much more complicated and not germane to this discussion, I have addressed it in one of my other articles.
The following illustrates exactly how student income affects financial aid:
1. In the financial aid formulas, students have a $3,000 income protection allowance, but for every additional dollar earned they lose 50 cents in financial aid:
Example: $5,000 earned – $3,000 exempt = $2,000 subject to the 50% assessment = $1,000 lost in financial aid.
Tax consequences: The $5,000 earned is subject to 7.65% in social security and Medicare resulting in an additional $383 lost!
If the student has larger earnings, it looks like this:
Example: $8,000 earned – $3,000 exempt = $5,000 subject to the 50% assessment = $2,500 lost in financial aid.
Tax consequences: Of the $8,000 earned, $5,000 is exempt leaving $3,000 subject to 10% federal and $8,000 subject to 7.65% social security and Medicare = 300 + 612 = $912 lost.
2. In the above example, let’s assume the student banked $5,000 and listed it on the FAFSA. The student would lose an additional 20% or $1,000 just for having it! Of the $8,000 earned, the total amount of financial aid lost in taxes and assessments would equal $4,412, or 55%!
3. Even if the student has no earnings but will attend one of the elite private and/or state colleges that require the FAP, there will still be an automatic income assessment of $1,000! However, this can be avoided – if you know how.
In order to receive maximum financial aid without the slightest hesitation on the part of a financial aid officer, income planning and asset repositioning must be completed no later than Dec. 31st of the 11th grade, or no later than Dec. 31st of the 10th grade if the student is applying to an FAP school.
Other strategies which have literally saved families millions of dollars over the years include:
· The ambiguous noncustodial parent strategy, which has reduced the cost of college by as much as 90%;
· The winter clothing allowance, which has saved students from southern states attending northern schools as much as $2,600;
· The “no work” work-study award, which has been worth as much as $8,000 over 4 years;
· Strategically negotiating for the best possible financial aid package, much like wheeling and dealing for the best price on a new car, has produced incredible results; and
· Professional Judgment, which few families are aware of, comes into play when there has been a significant change in family income, assets, marital status or health.
In order to win the college funding game (which repeats itself every year), a family must have the most up to date information, precise timing, persistency – and/or professional counseling from an expert in income planning and asset repositioning to do battle in the arena the College Funding Process has become…