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Posts Tagged ‘College Funding’

As college costs continue to rise, parents continue to search for ways to lower the pain in their wallets from getting a college degree.

What could be better than having the money saved to pay for college?  How about having help from Uncle Sam?  But with so many choices, how can you most effectively accomplish the twin goals of paying for college and saving your retirement nest egg? I discuss many in my College Planning Service.  Here is a little primer on some popular options.

With a qualified tuition plan, like a 529 Plan, you have a tax-free incentive to save for college.  For years the investment industry has promoted the benefits of saving for college using these qualified tuition savings plans.  But are they really the best or most beneficial option for you and your student?

WHAT IS A QUALIFIED TUITION PLAN and CAN IT HELP YOU?

Created under the Small Business Job Protection Act of 1996, qualified tuition savings plans (QTP) include a number of options that provide tax incentive savings for college savings.

The most popular of these options is the 529 Plan (named after the section of the code where they appear).  But there are two varieties of these plans and understanding the differences may help you avoid some costly mistakes.

Generally, a QTP is an investment vehicle that allows someone to set aside money that can be used towards the expenses incurred at an eligible school or college. It can be used to cover the tuition and fees of an undergraduate degree or vocational program.

Two Options

There are two key options:  a prepaid tuition plan or an investment plan.

Prepaid Tuition Program

With this option, you can set aside a predetermined amount that the program manager agrees to use to cover the expenses for a particular time period.  These options are limited to certain schools.  And the school contractually accepts the amount set aside to cover the expense with the funds set aside.  If a participant chooses not to attend, then the market value may be withdrawn (subject to limitations) and used at another school.  But the value of the account may not be enough to cover the actual expense.

College Savings Plan

This is the classic version of a QTP.  Money is invested for a particular beneficiary but can be used at any eligible school or program.  The biggest difference is that the investment burden falls on the shoulders of the participant.

The Upside

Investing in a 529 means that your student-beneficiary can  withdraw the funds tax-free when it comes time to pay college costs.  In some cases states offer a tax deduction for setting money aside (but not in Massachusetts).

Problems to Consider

A common complaint: It limits withdrawals to cover only eligible expenses. The money invested into the account is restricted to “qualified” expenses specific to your education. While this list is broad, certain school-related expenses may not be eligible.

If money from a 529 account is used on something not qualified, the investor is subject to income tax and a ten percent early distribution fee.

  • Limitation on investment choices: You are limited to the plan menu offered by the state sponsor.
  • Limitation on investment changes or rebalancing: You can only switch investments once per year.  Or you can enroll in an auto-rebalancing feature (quarterly, semi-annually or annually) but there may be a cost.
  • Fees and expenses may be high: In addition to the underlying mutual fund expenses (about 1% – 1.5% for actively managed funds), there is an advisor and state management fee. These can run about 1% to 1.5%. (A cheaper alternative involves low-cost Exchange Traded Funds). And in some cases, you may be paying a commission for the purchase of shares.
  • Financial aid eligibility may be impacted:  Assets held in such plans are assessed by financial aid.  If you have a large enough balance, you may reduce your odds for receiving financial aid. The titling of the account can be critical to helping avoid this potential problem.
  • Improper tax planning: If you’re in a low enough tax bracket (marginal rates under 15%), you may not benefit as much compared to the costs of the plan.  These plans are better suited for those in higher tax brackets. And for estate planning purposes, they are ideal for grandparents looking to move large amounts of money out of their estate for the benefit of the living.

 

Need Help Understanding Your Options?

 

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don’t Just Get a Loan. Get a Plan

 

 

 

COLLEGE HELPLINE:  978-388-0020

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For most families, paying for college for their kids rivals buying a home as the largest investment that they will ever make.

College is viewed – and rightfully so – as a key to a better future.  Even as the cost of college continues to escalate at a pace almost double the inflation rate (nearly 5% per year compared to the historic average of nearly 3% for CPI), there is still a high and growing demand for higher education services.  The proportion of high school graduates who enroll in a degree program within one year of graduating from high school has grown from 49% in 1976 to 66% in 2006-07 according to the College Boards “Trends in College Pricing 2008” report.

Going to College:  Still Worth It

Generally, it is still worth the investment.  According to the US Census Bureau, those with a college degree on average will earn a median income of nearly twice that of someone with a high school degree. And other research indicates that those with a college degree historically have lower and shorter periods of unemployment.  (This may not seem like it as we go through the ongoing impact of the Great Recession but there is data supporting this).

Colleges know this and as a result price their “product” according to this demand for more educational services. One result is that without consumer pressure the colleges are pricing their “product” at whatever the market will bear.  And that price tag continues to go up. At last count, a four-year degree at a public university was around $16,000 per year for all tuition and fees. For private schools this number falls into the $34,000+ per year category.

To pay for this some parents will do almost anything and make almost any sacrifice sometimes to the detriment of their own financial health. So how do we balance the long-term investment in our children with the long-term investment in our own retirement?

Do you want to pay less for your student’s college education? Do you want to find a better way to balance paying for college without sacrificing your retirement nest egg? Be an informed consumer. Wrong, outdated or misguided information about paying for college or qualifying for financial aid just compound the problem for many families.

Too often families are under the mistaken belief that there is nothing that they can do but suck it up and write the check.  Or there is the dream of the big money athletic scholarship.  Or they mistakenly think that there is no financial aid.

All of these beliefs are dangerous to your family’s financial health. The key is having the right information and help to navigate through the minefield that is college funding and financial aid.

Myths about Financial Aid

1. Not Enough Financial Aid is Available.

During the 2009-2010 academic year, students received about $168 billion in financial aid.  This included the entire spectrum of aid such as grants, scholarships, Work Study, low-interest and government-subsidized loans. The largest proportion of this aid is in the form of loans.  Despite the budget woes in Washington, there is still money available for college through these programs.

2. Only students with good grades get financial aid.

Not true.  Colleges are seeking diversity among their classes.  Admissions officers are looking to have students from every socio-economic demographic represented.  And every student has some special skill to add to the mix. The key here is to match up the right student with the right school.  Is it better to be a big fish in a little pond or a small fish in a big pond?  Someone who is a “B” student but with a particular aptitude in a subject might have better odds of getting into a smaller school and be offered aid than the valedictorian competing with every other valedictorian applying to Harvard.

3. You have to be a minority to get financial aid.

Again, this is false.  Financial aid comes in many forms.  Loans are awarded based on the Expected Family Contribution (EFC) which is influenced by family size, parental income, and number of kids attending college at the same time. Loans are need-based and are color-blind.

4. I won’t need government help.  I’ll get scholarship money.

While you may have a talented student who excels in a particular sport, extracurricular activity or is gifted academically, hope is not a plan.  Consider the fact that National Merit Scholarships are very prestigious but can be  double-edged sword.  A student may receive the scholarship but receive no other aid from the school leaving the parent or student to foot the entire remaining bill.

Remember that College Planning is NOT just saving FOR college. It is not just saving in a 529 Plan.  College Planning is tailored to an individual family’s needs and is focused on SAVING ON the cost of college by using all the strategy tools in the financial aid tool box:  savings, investments, taxes and EFC reporting.

5. I make too much money to qualify for any aid or be able to do anything to lower the cost.

False.  This is the biggest myth of all and the most dangerous.  While a family with significant income may not be eligible for needs-based aid, there are dozens of strategies available that may lower the cost of college.  And even with a short amount of time until school, there are ways to lower the Expected Family Contribution (EFC) before filing a financial aid form.

  • Knowing how and where to hold your assets may help you qualify for more aid.  Hint:  Retirement accounts are a great way to kill two birds with one stone.
  • Checking your ego at the door when completing the FAFSA can help qualify you for more aid.  Be careful how you report the value of home or business equity or your stock portfolio.  Most people overestimate because they don’t know this one tip.

6. I have a child entering college next year and it’s too late to do anything.

Absolute nonsense.  I can literally rattle off at least 12 cost-saving tips including transfer credits, AP testing and proper use of home equity.  There are another dozen ways to lower your EFC and 10 different ways to save in the most tax-efficient way.

For one early retiree I showed him one strategy that netted him more than $9,000 in free, no-strings aid from Babson College for his college freshman son.  For another, I showed him tax strategies that will save him the cost of one year of tuition at Colby College for his soon-to-be freshman.

BOTTOM LINE: The Less You Know, the More You Pay.  The More You Think You Know, the More You Pay. The More You Know, the Less You Really Pay.

Pay Less for College with a Personal College Plan

Saving ON College Starts Here

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For college-bound students, funding retirement has to be the farthest thing from their minds. Yet, with a little planning, parents may be able to kill two birds with one stone. Unfortunately, most parents of college-bound kids tend to overlook some obvious ways to lower the cost of college but wisely using the tax code and some retirement planning techniques can help.

It may be a low-priority item, but this strategy can help parents when it comes to planning how to pay for college. How?  By lowering the Expected Family Contribution (or EFC) of the family and sheltering assets in a retirement account, there is the potential for qualifying for more needs-based financial aid.

Roth IRA

Consider using a Roth IRA for any earnings that a student has from part-time work.  For students over 16 they can put away up to $5,000 each year (or up to their total earnings, whichever is less) from all those part-time or summer jobs. Students already in college can also use this same strategy.

A Roth IRA allows any wage earner regardless of age to put money away now and then later withdraw money without paying taxes on the earnings. When you contribute to a Roth IRA, there is no tax deduction as there is with a traditional Individual Retirement Account (IRA) but there are other advantages.

If a student earns money and the parents leave it commingled in one of their accounts, the balance will potentially be assessed at the student’s higher rate as an asset available for paying for school.  Parents may want to maintain control over funds and have the earnings put into an account in their name but this will show up as a parental asset subject to assessment by the financial aid formulas used by colleges.

On the other hand, funds in a Roth IRA are not counted and will not affect financial aid calculations.

Follow the Road Map

The key to this strategy is following the rules of the road. Any funds placed in the account as a contribution may be withdrawn at any time free of taxes or penalties.

For earnings that may accrue on the account balance, these may be subject to income taxes or penalties but there are exceptions.

Converted Assets

For amounts that were converted from another IRA and recharacterized as a Roth, there are special rules.  For amounts that meet the five-year holding test (from the date the account was first opened) then no income taxes or early withdrawal penalties apply. If a withdrawal is made within five years, then a 10% early withdrawal penalty applies unless it is for a special purpose.  One of the eight special purposes is withdrawals used for higher education expenses.

Withdrawals of Earnings

While income taxes will apply, no 10% early withdrawal penalties apply when the proceeds are used for one of eight special purposes including higher education expenses.

Distribution Rules

For distributions from a Roth IRA you need to note that Roth contributions are always considered to be the first amounts withdrawn.  These are not taxable.  Then any amounts that were converted from other IRAs are considered to be withdrawn second and subject to the time line noted above.  Finally, earnings on the account are considered to be withdrawn last.

Ideal for the Self-Employed Parent

Consider employing your kid in your business and paying them instead of just giving them an allowance.  I write about this on a previous blog found here. This way you can lower the taxable profit from your business which may help you qualify for more financial aid.  And by diverting the wages earned into a Roth IRA as a contribution, your child will not have this asset exposed for the financial aid calculations.

Use It Now or Later

This strategy can be used for late-starters, those who haven’t saved enough for upcoming college bills.

But it can also work very well if you start early.  Since there is a five-year rule in place, open a Roth IRA account even while the child is in middle school and working part-time outside the home or in the family business.  Then by the time the child is ready to enter his third or fourth year of college, he may be able to withdraw some of the earnings to pay for costs without paying any penalties.

By using this strategy, parents can help their students learn to save and the funds can be available in a tax-efficient way during college to pay qualified education expenses.  Or they can skip the withdrawals while in college and use them later for graduate school or to help pay for their first home purchase.

Advantages of This Strategy:

  • Shelters assets from financial aid calculations
  • May help lower family Expected Family Contribution (EFC)
  • Instills value of saving early for goals
  • May help accumulate capital that can be used later for school with tax efficient withdrawals
  • May help save for future home purchase or better yet … retirement

 

For more tips, check out my free webinar offered monthly. For a current schedule visit the Clear View website.

 

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College costs continue to escalate.  The burden on families grows every year.

Even before the Great Recession trying to balance the competing and emotional needs of paying for college while trying to save for retirement was a struggle. Let’s face it: Paying for college is as much a retirement planning issue as anything else.  Don’t ever forget that.

So how much is a college education worth to you? The average price keeps going up and is the only part of the economy not showing any slowdown in price increases (besides gas prices of course).

  • Average public 4-year school tuition is now $16,000 per year
  • Private colleges are at $32,000 per year
  • Elite private colleges are near $50,000 per year

And this doesn’t include tuition, room, board, fees and “extras.”

Again, how much is this worth to you? Will you be satisfied eating Mac and Cheese or working as a Wal-Mart greeter during your “Golden Years” knowing that your child got the most expensive education that money could buy?

If the answer to that is “hell no,” then you’re at the right place.

Become an Informed Buyer of Education

Welcome to my latest blog where I will endeavor to bring you insightful and creative tips on how to be an informed consumer of higher education.

Trying to get a handle on what to do is difficult.  Let’s face it:  Unless you’re Octa-mom or do this everyday, you’re flying blind when it comes to figuring out how to manage paying for college. Have you actually seen a FAFSA form lately? Do you really want to?

Sure, if you have a couple of kids within a couple of years of each other, the rules might be the same.  Sure, you can rely on what your neighbors did for their kids who graduated a few years ago.

Or you can have a plan tailored to your situation.

Look, just like tax laws, financial aid rules and how college admissions officers work their magic change every year.

So you may as well have a plan and be a part of making it happen.

This blog and my website are here to help.

Stop by and let me know your thoughts.  Shoot me a question.  And feel free to try out the exclusive college planning service website on your own. And then let me know when you’re ready to get serious about this by calling me directly at 978-388-0020.

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As noted in previous articles and posts, whether or not your student qualifies for federal financial aid for college will depend on the Expected Family Contribution (EFC) calculation.

Typically, almost all assets and income are included in this calculation by financial aid officers.  There are exceptions to all rules and in this case, federal aid formulas (under the “Federal Methodology”) exclude home or family farm equity, money accumulated in tax-deferred retirement accounts and cash value built up in a life insurance policy.  The cash values of fixed and variable annuities are also excluded.

Since these assets are not counted in determining aid, some families may be tempted to consider “asset shifting” strategies.  With such techniques, a countable asset like savings or investments through a brokerage account are used to acquire one or more of these other non-countable asset types.

Friends and clients have attended financial aid workshops sponsored by college aid planners or insurance agents who recommend purchasing annuities or life insurance.  Sometimes these strategies involve doing a “cash out” refinance or drawing on a home equity line of credit. Tapping home equity to fund a deposit into an insurance or annuity vehicle may benefit a mortgage banker and insurance agent but is it in your best interests?

Asset Shifting to Qualify for More Financial Aid: Is it worth it?

Well, that depends on what side of the table you’re sitting on.

Yes, it’s true that anything you can do to reduce your expected family contribution may help boost the amount and type of aid your student may receive.

On the other hand, remember these points:

  • Family assets are counted at a low contribution rate of 5.6% above the asset-protection allowance calculated for your family circumstances.
  • If you put money into a tax-deferred account, it’s locked up.  Access to the funds before age 59 1/2 results in early withdrawal penalties in most cases.
  • You may have to pay to borrow your own money.

Granted, socking away money into tax-deferred vehicles may make sense for you.  And as I’ve noted before, paying for college is as much a retirement problem as anything else so anything you can do to provide for your Golden Years can be a good thing.

But don’t get tempted into long-term commitments to cover short-term financing issues.

By shifting assets you lose access and flexibility for the cash.  If employing such a strategy reduces your emergency cash reserve, then you’ve increased your risk to handle unexpected cash needs.

Cash Value Life Insurance and the Bank of You

Cash value life insurance accumulates its value over time.  Starting a policy within a couple of years of your student’s college enrollment is not going to help you.  During the initial years of such a policy very little cash is built up as insurance expenses and first-year commissions paid out by the insurer to the agent are very high which limit the amount of paid premiums that are actually invested for growth.

But consider this:  For some who have existing policies or are looking for a way to build cash over time that offers guarantees and is potentially tax-free, then by all means use life insurance.  There are strategies commonly referred to as the Infinite Banking Concept or the Bank of You which champion life insurance as a way to build and access your own pot of money available to you to borrow for almost any purpose.

There are many attributes to life insurance that make these concepts useful

  • Tax-free dividends,
  • Access to money without credit or income qualifications or delays from a traditional bank,
  • Guarantees on the cash value from the insurer.

But one downside is the cash flow needed to actually build up a pot big enough to tap into for buying a car much less paying school tuition.  You would in all likelihood need to divert all other available cash and stop funding any other tax-deferred plans to build up the cash.  And then there is the time line needed.  To effectively build up the cash, you really need to bank on at least 5 years before you have a Bank of You to tap. This is why such a solution is not recommended for those with students about to enter college.

Bottom Line:

Don’t let the financial aid tail wag the retirement planning dog here.  Only use these tactics after consultation with a qualified financial professional, preferably one who has no vested interest in whether or not you purchase a particular product.

 

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It’s never too early or even too late to start planning for ways to pay for college or post-graduate school.

Myths

There are a number of myths out there that can adversely impact your planning efforts:

1.) There’s not enough aid available;

2.) Only students with good grades get aid;

3.) My family makes too much money to qualify.

Reality

In reality, both “self-help” aid like loans and “gift” aid like grants and scholarships are available.  To increase your odds for getting your share there are a number of education-oriented and tax-oriented strategies you can use.

Some Tips When Applying for Financial Aid:

  • Fund Your Retirement— “Federal method” for calculating need usually does not consider retirement assets so put as much as you can into these accounts.
  • Reduce Assets Held in the Student’s Name—Parental assets are assessed at a lower rat: So buy the computer, dorm furniture or car in the base year (the year before filing the FAFSA) out of your student’s savings accounts.
  • Avoid Cash Gifts to Students—It’s Better for Grandma to Pay the School Directly: If you’re not qualifying for aid, at least it may help out her tax planning.  Better yet, take out the loans which are deferred until graduation and then let grandma help pay them.  This way you maximize your student aid without having grandma’s help count against the student.
  • Employ Your Child in Your Business and Use the Income to Fund a Roth IRA. The earnings won’t be subject to some of the typical payroll taxes because you’re employing family (restrictions apply) and by stashing it into the Roth, you’re building up a pot of money that can be withdrawn without tax penalty when used for qualified education expenses as long as the account has been open 5 years.

 

For more tips and help, consider using a qualified College Aid Planner like a CERTIFIED FINANCIAL PLANNER (TM) professional.

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Do you own investment real estate or a business? Have you been considering buying a rental property or starting a business? Have kids going to college in a few years?

If you already plan on your kids going to college, it’s never too late to start planning effective and efficient ways to increase savings, lower your taxes and improve your odds for receiving student financial aid.

Let’s say you already give your children an allowance. You’re already paying out of pocket and not getting any tax benefit. With a few changes you can turn that cash outflow into a tax deductible expense that can even help your kids save for college.

Consider hiring them to work in your business or on the rental property you own.

By paying them a reasonable wage for services like landscaping, cleaning, painting, shoveling snow or doing office administrative work like filing, stuffing envelopes or printing marketing flyers, you have an additional deductible expense which lowers the net income or increases the net loss of your business or property.

And for children earning income in the family business, there is no requirement for payroll taxes. And if you keep the amount of “earned” income below certain limits, you won’t be at risk of paying any “kiddie” tax either. (“Kiddie” tax limits adjust for inflation each year).

In effect, you have shifted income from a taxpayer with a higher tax rate to a low- or no-income tax paying child.

Now get your child to open a Roth IRA with the money you pay them and they have the added benefit of tax-free saving for college since Roth IRAs can be tapped for college tuition without paying a penalty as long as the Roth is open for at least five years (restrictions apply).

By reducing your income, you can also reduce your Expected Family Contribution (EFC) which is the critical number used to determine the amount and kind of student financial aid your child can get for college. The EFC is calculated using a number of things including the amount and type of parental assets as well as reported income. EFC is recalculated each time a financial aid form is submitted and is based on the assets and income from the year before.

So to improve your odds for financial aid, one strategy is to lower your reported income. By employing your child to lower your business or rental property income, you may be able to lower your EFC and improve the amount of aid your child receives.

About Steve Stanganelli, CFP ®

Steven Stanganelli, CRPC®, CFP® is a CERTIFIED FINANCIAL PLANNER ™ Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with Quest Financial, an independent fee-only financial planning and investment advisory firm with corporate offices in Lynnfield, Massachusetts and satellite locations in Woburn and Amesbury.

Steve is a five-star rated, board-certified financial planning professional offering specialized financial consulting advice on investments, college planning, divorce settlements and retirement income planning using alternatives like self-directed IRAs.

For more information on financial planning strategies, call Steve at 888-323-3456.

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