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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 Wrong, outdated or misguided information about paying for college or qualifying for financial aid just compound the problem for many families.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

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Growing up in a middle class family with parents who worked on the production lines of local factories, it was instilled in me from a very young age that education was the ticket to a better life.  While times have changed parents still want to see a better life for their kids and education is still the key.

American Dream: Worth Believing?

As a new parent myself (my other identity is as Spencer’s Dad), I want the same thing.  I believe that the American Dream is founded on education which brings with it the opportunities for a high quality of life.

I’m not as cynical as my favorite comedian of all time, the late George Carlin, who once said in reference to the “education-industrial” complex: “ It’s not called the The American Dream for nothing, because you have to be asleep to believe it.”

But he did make some great points in his monologue:  Our education system is sort of broken and there’s no real incentive to fix it.

Escalating Costs Threaten Future

Let’s face reality here.  The cost of getting a baccalaureate degree even at a public university or college comes with an average price tag of $16,000 per year.  And that’s typically before room and board. Private schools average in the $36,000+ range and elite schools are near $50,000.  That’s per year. More than the cost of my parent’s first or second home.

When I was growing up, I entered the University of Lowell (now University of Massachusetts – Lowell) in the fall of 1982 and the cost for each course was about $400.  When I entered Bentley University for my master’s degree in finance in 1991, the $1600 cost for one course was equal to what 12 credits cost for an entire semester at Lowell.

Since then inflation in higher education has been a given. Despite three stock market corrections in the past decade and a financial crisis that lead to The Great Recession, there has been no let up in the escalation of tuition and fees for school.

This is not good for individuals.  Nor is it good for us as an opportunity society.  This is not meant as a political statement but a recognition of reality.  The wealthiest among us will be able to pay their own way.  The poorest among us will get aid.  But as noted in a recent discussion on NPR’s On Point on May 26 entitled “Affluent Students Dominate Top Colleges,” the reality is that higher education is not as diverse as our society at large.  The consequences of this lack of diversity can be wide reaching impacting not just the individual but his interactions with others as well as developing the talents of people needed to deal with society’s ills and propel us forward in technology, healthcare and business in general.

It contributes to a perceptible widening between the ‘Haves’ and ‘Have-Nots’ and undermines the Middle Class foundation of our society. And when people feel disconnected from society and the glue that binds us dries up, our standard of living and global standing erode.

As someone commented on the On Point blog after the show:

As a community college professor, and the father of a daughter who just graduated from Wake Forest, I would like to have extended this discussion in a couple of ways.  The real middle class (not poor enough to get Pell Grants, etc., nor rich enough to write the big checks) is the group that is really caught in this dilemma.  More needs to be said about this.

The change in the student body at these colleges is very striking to those of us who graduated years ago.  I worked summers and was able to pretty much pay my way through Wake 40 years ago.  Most of my friends were lower middle class guys from small towns in N.C. Today more than half the student body comes from outside the state, and many are very affluent.  My daughter, from a family with two teachers as parents, felt like the poor kid through most of her four years, and she was well taken care of.  The only reason she was able to attend this fine school was my dear departed mother’s money (it took it all), and scholarships (which just seemed to increase the EFC).  That, and being an only child.  But “on point.”  The economic imbalance that now exists on a small liberal arts campus is disturbing, as is the lack of not just racial diversity, but class diversity.

Paying for College – A Real Risk for Retirement, Too

Politics aside, this has been a real financial crisis in the making.  Consider this:  For every dollar that a parent uses to pay for a child’s college, there is one less dollar for that parent’s retirement.  So the crisis in paying for school is also a retirement crisis.

We know that going to get a college degree is a positive financial decision.  The often quoted number is that a college-degree holder earns more than $1 million more over his or her lifetime than someone without a degree.

Students are walking out with an average of $20,000 in student debt. That’s not terribly bad when compared to the lifetime payoff.   (I personally think that it’s higher and the many “for profit” diploma mills that prey on people’s hopes and fears add to this as well. But that’s a discussion for another day).

But the problem is that Middle Class parents are squeezed from competing priorities:  taking care of elder parents, saving to fund a dignified retirement and helping their kids attain the key to their own futures.

Help for Those Stuck in the Middle

Some solutions to this crisis are way above my pay grade.  But to the college professor’s point noted above, the real middle class needs help with this dilemma.

Most financial advisers and even CPAs do a disservice to their clients.  Advisers focus almost exclusively on investing. Accountants generally are looking in the rear view mirror and dealing with tax liability.

For those advisers like myself who recognize the link between college and retirement, we know that there has to be a better way to handle paying for college without having to go broke doing it.

Tips to Paying Less and Getting More

  1. Get a financial plan in place:  There’s no reason to do this alone.  The FAFSA and CSProfile financial aid forms are confusing.  And like taxes, things change from year to year.  Answering questions the wrong way can jeopardize chances to get all the financial aid for which a student may be eligible;
  2. DON’T become a victim:  For late-starter parents there is a temptation to go with the easy fixes that sound good.  Too often folks start getting invitations to “free” seminars which are usually nothing more than pitches to buy insurance.  Yes, certain types of insurance can shelter assets that don’t need to be counted for the purpose of financial aid calculations.  But there is a cost to losing that flexibility.  And the time frame needed to make this strategy viable … well, let’s just say grammar school makes more sense than starting when your little tot is a high school junior.
  3. Don’t pay sticker price:  The truth is that the price you see isn’t the price you need to pay.  And good students who would do well at a particular school sell themselves short by self-selecting out of applying for fear that they can’t afford it.  While that may be true, it’s also true that a financial aid package can be arranged.  Students may actually end up paying less to go to one of their preferred schools than to a “safety” like a public school.  (Let’s face it, even after a recession and the Flash Crash, universities still have endowment money but public schools are being squeezed by state budget concerns).
  4. Lower you Expected Family Contribution: There are a variety of tax-efficient cash flow and income strategies that late-starter parents can use to show lower income or assets that may help lower the EFC and increase eligibility for aid.
  5. Use a Cash Flow Model: Through smart planning a family can devise a plan on which buckets to pull money out of in a tax wise way and still fund their retirement plans.  Believe it or not but it can be done.
  6. Become an educated consumer: Don’t simply rely on what friends and neighbors say.  Get to know the process.  Work with someone who can help show you the way.  Realize that there are two prices for a college education:  The one that everyone pays because they don’t know better or the one for those who know how to navigate through the system.

Exclusive College Planning Service Helps Parents Pay Less for College

To learn more strategies that may lower the out-of-pocket cost for college costs, please join me for one of my free monthly webinars.  The next one is on June 9 at 8 PM. Details can be found on my company website or by clicking here.

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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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In the initial article of this series, I mentioned ten specific ways to lower college costs.  These included such ideas as taking Advanced Placement exams to earn college credit, considering an in-state college, using the American Opportunity Tax Credit  formerly known as the Hope Education Credit, employing your child in your business or investment real estate business and encouraging your child to use the proceeds to fund a Roth IRA.

But even if you haven’t stashed a lot aside for expected college costs, there are strategies you can take to maximize the financial aid that your child may be able to receive.

Many parents mistakenly believe that they “make too much money” to receive aid.  Or they look at the “sticker price” of a private school and think that it is way too expensive to afford.  In reality most people never pay the full sticker price and with some planning ahead of time many can find ways to make even such private schools within reach.

Yet many would be surprised to find out that by speaking with a knowledgeable professional they increase their chances for an aid package that makes college more affordable and less stressful to their personal retirement plans.

Remember that the more time you have before your child or children begin college, the more options you have.  But even if college tuition bills loom on the horizon, there are things that you can do to be better prepared.

Expected Family Contribution:

Everything depends on the Expected Family Contribution (EFC) calculated from a review of income and asset documentation and the Free Application for Federal Student Aid (FAFSA) completed after January 1 of your student’s senior year of high school.

A particular formula is applied to this information to determine what income and assets are eligible from the family (including the student) toward the total cost of a year at college for everything from tuition and fees to room and board, books, supplies and travel.

  1. So this first year, called the “base year,” is the crucial one.

Ultimately then, your goal is to lower your EFC by employing strategies that lower your income or assets in the crucial base year.

Consider this:  If you own a business, you could increase your outflow for needed equipment that results in a lower net income.  You could delay your billings and collections to also lower your net income.  While a business owner needs to report the value of a business, the FAFSA form is not the place to brag.  The value of one’s business need only include actual cash on hand and tangible assets but not intangibles like “goodwill.”  This may help lower the value of your business and increase the amount your student may ultimately be eligible to receive.

On the other hand, maybe you’ve always considered starting a business or because of your job prospects this has become a necessity.  Don’t wait until the children have started or finished school.  By launching the business in the base year, you will incur expenses (including possibly depreciation on equipment) that will lower your reported income.

Even if you don’t own a business, you may have some control over the income and assets you report.

If your child will need a car, a computer or other school supplies, consider buying them in the year before completing the FAFSA.  Since credit card debt is not taken into account in the FAFSA, use extra cash instead to pay off these debts.  Another option might be to prepay property taxes or your mortgage which also provides you with an added tax deduction. All of these strategies will lower the cash on hand.

If you’re expecting a year-end bonus, then try to negotiate with your employer to defer receipt of the bonus into a non-base year.  By doing so, you’ll avoid having the colleges count this twice: once as income in the base year and then again possibly as an asset in your savings accounts.

It’s important to minimize assets held by the student.  So consider using savings or investment accounts held in the student’s name to acquire a car or computers or other needed supplies.  It’s also a good idea to dissuade grandparents and family members from giving cash gifts to the child.  In lieu of a gift to the student, a grandparent could direct the same amount of cash to pay toward the college tuition or fees.

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