Parents need to understand that there is more to college funding than a 529 Plan. Saving FOR the cost of college is not the same as saving ON the cost of college. And there are more ways to save on the cost than to simply rely on scholarships, grants and financial aid. Paying for college with tax scholarships can be an effective way to lower the overall cost of college.
There are many myths surrounding college funding that can be dangerous to a family’s long-term wealth. These include ones I hear often:
I make too much money.
I have too much savings.
I can’t benefit from planning.
Even parents with adjusted gross incomes of $300,000 per year can qualify for financial aid. And while parental assets of more than $50,000 can impact financial aid, you do have opportunities to minimize it. The bigger issue is finding ways through proper planning to stretch your dollars and save on taxes.
One overlooked aspect of college funding is proper college selection. With the average four-year undergraduate degree taking nearly 5 1/2 years to complete, parents should be focused more on finding the right school at the right price and not just the sticker price of the cost of college. If your student is unclear on a course of study or finds himself in a learning environment that is not suited for his style, you and your student will end up paying more in the long run.
By knowing how the all-important Expected Family Contribution (EFC) is calculated, you can make changes ahead of time that maximize your benefits. For instance, home equity is not an assessed asset for most schools like those using the FAFSA form for the federal methodology. But doing a cash-out refinance and parking the proceeds in a bank account to pay for school will hurt your chances. Other schools may use the CSS/Profile financial aid form for the federal methodology. These schools do use home equity in their calculations but often they limit the amount. So you may be ill-advised to simply cash out your home equity.
Life insurance and annuities are assets that are not counted but buying them the year before your student heads to college may be an expensive mistake especially because of the underlying expenses associated with these types of assets.
If you own a business or investment property, you can lower your income and tax liability by hiring your child instead of paying an allowance. This is essentially a way to shift income to someone in a lower income tax bracket resulting in an instant ‘tax scholarship’ because of the tax savings.
Working with a qualified financial planner can help show you the best way to pay for college using such creative tax and income strategies without going broke or putting your retirement goals at risk.
