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Posts Tagged ‘Paying for College’

If you have two years before your student enters college …

 Test Prep

Every tenth of a point added to a student’s GPA may save thousands of dollars in loans that won’t have to be paid back later because colleges will give preferential aid to good students.  So now’s the time to consider test prep courses for the SAT.

 

Business Interest

Financial aid is based on the parents’ tax return from the base year (the year before the student enters college).

So any strategies (including tax strategies) that can lower the reported family income may help improve odds for financial aid. If you have any interest in running a business on the side or working as an independent contractor (i.e. real estate agent or MLM distributor, for example), now  would be the time to start.  That’s because most businesses will show losses during the first couple (or more) years which can help lower the Adjusted Gross Income and improve odds for financial aid.

 

Real Estate Strategies

Use home equity if you have any.  The possible “triple play advantage” for this option is clear:  1.) in most cases there is a tax deduction for the interest, 2.) you temporarily reduce the equity in your property and lower your asset value which lowers your potential family contribution and 3.) as a secured loan, the interest rate is low compared to other options.

Another late-stage planning technique is to use the proceeds to buy an immediate annuity.  This can shelter the capital and the payout can be used toward the mortgage payment. For details on this strategy, call for a College Cash Flow Planner Model.

 

FOR MORE PERSONAL TIPS, CALL STEVE @ 978-388-0020 or 617-398-7494

Exclusive College Planning Service Helps Parents with Costs

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

 

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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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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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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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PAYING FOR COLLEGE.

 

 

Do you own a business (full time or part-time)?  Do you own investment real estate or a farm?

 

Would you be interested in learning how to use IRS rules to help you pay for college?

 

If you want to find ways to pay for college without ruining your personal retirement, there is hope (and it’s not just the renames tax credit mentioned below).

 

In this series, we’ll go over the various strategies available to help parents explore the various possibilities to reduce taxes and improve the odds for receiving financial aid, grants or scholarships.  (Consider this: There are more than 110 different strategies.)

 

Food for thought: 

 

  • Encourage your pre-teen to open a Roth IRA with earnings from their paper route or other jobs.
  • Consider hiring your child to work in your business or help with chores related to your investment property.
  • Use a CollegeSure CD issued by an FDIC-insured bank to accumulate savings
  • Think about using a fixed income annuity to hold a portion of money for college to avoid the potential loss in principal that can happen with a 529 plan invested in mutual funds.

Tax Tips:

 

The Hope education credit is renamed the “American Opportunity Tax Credit,” is increased to $2,500, and applies to four years of

college, not just the first two. In addition, 40% of the credit is now refundable. Income limits apply.

 

Another break for those paying higher education expenses: In 2009 and 2010, funds in Section 529 college plans can be used tax-free to pay for

students’ computers, computer technology, and Internet fees.

 

For more information on this topic, continue to check out this blog as well as the weekly Wedesnday night conference call series.

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