As many of you know, I’ve been blessed with having two children. Recently, as I sat holding the newest addition to our family, I thought of college. I could see the sky-high costs of college as I met with clients. How can I put my kids in the best possible position for financing their college education? I don’t want to shell out 200k or 300k nor have them carrying that kind of crazy debt load, or possibly both! Yuck!
I have recently read a few books on the subject and learned some startling ideas that I think could be vital in helping you understand how financial aid is doled out. For your further reading pleasure I strongly suggest two books in-particular that I reference throughout:
Paying for College Without Going Broke 2012 Edition by Kalman Chany1
Debt-Free U by Zac Bissonnette2
Alright, let’s get right into it…
1. First, there are two distinct forms of financial aid methodologies- Federal and Institutional. The FASFA form is specifically for the Federal aid methodology. The PROFILE form is for the institutional aid methodology.
2. Under the federal and institutional methodology, your income will be assessed up to 47%, your assets will be assessed up to 5.65%. However, your child’s income will be assessed up to 50% and your child’s assets will be assessed HIGHER up to 20 to 25%.1
3. Because your child’s assets are assessed higher, anything that avoids putting money into their name is the best vehicle to finance their college education. This means to NOT put money in 529 plans, UTMA accounts, or trust accounts in the child’s name. If you want to sock money away, put it instead in an account in a parent’s name.
4. Try to defer income in order to reduce the “base income years”. If you have the possibility of receiving a bonus within the base income year (Jan 1 of a student’s HS JUNIOR year to Dec 1 of a student’s HS SENIOR year) or the last year that financial aid offices will look at (Jan 1 of a student’s college SOPHOMORE year to Dec 1 of a student’s college JUNIOR year assuming they graduate in four years), try to push to receive it as early or late as possible. Let’s say that nextyear will be your base income year- ask your manager or HR department to have them pay it to you this year. Alternatively, if this is the “last year” that your finances will be scrutinized and you’ll receive a bonus, ask your manager or HR department to push it into the following year which won’t be scrutinized.1
5. Additionally, for the PROFILE form, they know that a parent’s business needs working capital to operate!1 For the first $115,000 of net worth, colleges count only 40 cents on the dollar. For example, if a normal brokerage account is counted at 5.65% towards college contributions- the first $115,000 of business value is only counted at 2.26% towards college contributions (40% x 5.65%). So, if you are a sole proprietor or own a fairly small company- stock money away in a corporate account BEFORE saving money in a joint account outside of the company!
6. If you are able to file one of the short forms (1040a OR 1040EZ), you may able able to have BOTH parent and student assets excluded from federal financial aid formulas through FAFSA. This is known as the “Simplified Needs Test” when the parents have adjusted gross income below $50,000 and the parent(s) in the house uses one of the short forms listed above. This means that eligibility for the Pell Grant and subsidized Stafford loans will be determined WITHOUT regard to how much money the parent OR the student has in the bank or a brokerage account. (This does not apply to self-employed individuals, a partner in a partnership, a shareholder in a S corp, or a beneficiary of an estate or trust).1
7. Also, if you are curious to look for scholarships- check out www.scholarshipamerica.org and www.scholarship.com.
8. In regards to financial aid, consumer debt is BAD and home debt is usually GOOD. In Paying for College Without Going Broke1, they cite an example of how we usually look at net worth versus how colleges look at net worth. If you have 25k of money in the bank and 6k of a consumer loan (credit card, student loan, car loan), we would usually say that you have a 19k of net assets. In the wacky world of higher education, they IGNORE the consumer loan and say that you have 25k of net assets with ignoring the consumer loan. Therefore, if you have the ability and it keeps you from scraping the barrel, you are better off paying off the consumer loan. This way colleges will only see 19k in the bank!
9. Federal methodologies through FAFSA will ignore your home equity. However, institutional methodologies through PROFILE can INCLUDE your home equity. How does PROFILE value your home equity? It is a really weird formula!1 The max out the value of a family’s home at 2.4 times your family income. For example, if your family income is 60k, they will value your house at 144k. Your house could be worth 300k or 400k or 600k in the open market or by your property taxes, but they aren’t looking at market value. If your mortgage was 200k, they wouldn’t include the house as an asset. By their methods, it is underwater by 56k. Alternatively, if you mortgage is 90k, they look at the equity as 54k (144k – 90k). This is why lowering your AGI (adjusted gross income) is so important! The lower the income, the less the value of your home on the PROFILE form. Weird? Yes! But that is their system!
10. If your child is permanently living apart from you- perhaps because you are a divorced parent and the child is primarily living with one parent or they are living year-round independently at college- try to have the student declared “independent” from you. In Debt-Free U2, they list four primary criteria to be declared independent: parents refusing to contribute to the student’s education, parents unwilling to provide information on the application or for verification, parents not claiming the student as a dependent for income tax purposes, and the student demonstrating total self-sufficiency.
If you have any further questions about this particular topic, feel free to contact me.
What do you think about this topic? How are you planning on paying for your kids education?
Let me know what you think. Send me an e-mail at [email protected] with your advice and feedback.
Advisory services through Capital Advisory Group Advisory Services LLC and securities through United Planners Financial Services of America, a Limited Partnership. Member FINRA and SIPC. The Capital Advisory Group Advisory Services, LLC (CAG) and United Planners Financial Services are not affiliated.
Views and opinions expressed are those of Dave Denniston as of 5/24/17 and are subject to change based on market and other conditions. The information provided is general in nature. Consult your investment professional regarding your unique situation. Past performance is no guarantee of future results