You still remember that day 18 years ago when your precious son or daughter came into this world. It’s a memory you still cherish and treasure. Based on the fact that college educations are one of the fastest growing expenses out there, that’s probably the day you needed to start saving for college as well.
According to the College Board, a non-profit that administers college entrance exams, average annual tuition at four-year private colleges increased to $28,500 for the 2011-2012 academic year. If you throw in room and board, that’s another $10,089, making your “all-in” cost $38,589 per year. To put that into perspective, the cost of college from 2001-2012 increased at an annual rate of 2.6 percent more than the consumer price index. Ouch.
If you live in Georgia, you can always count on the HOPE Scholarship though, right? In the Fiscal Year 2011-2012, 202,306 students in Georgia received $458 million in HOPE scholarship awards. That’s fantastic. However, it’s now tied to Georgia Lottery revenues and the benefits are capped at 90% of tuition costs. The scholarship also no longer pays for books and mandatory fees. This trend will likely continue with additional benefit cuts to offset the shrinking Georgia Lottery revenue base.
The question in your mind might now be, “Is college worth it?” Recent studies show that over someone’s lifetime, college graduates make 84 percent more than those with only a high-school diploma. This differential is continuing to increase with post-graduate degrees becoming increasingly important and the variance between those with bachelor’s versus master’s or advanced degrees are starting to grow as well.
Unless your child will receive a scholarship for academics, athletics, artistic ability or some other reason your next step is to complete the Free Application for Federal Student Aid (FAFSA) form. This form helps determine how much in federal grants and financial aid a college student can expect to receive. It will take into account income and assets, but excludes home equity from your primary residence. If your child plans to attend a private school, you’ll probably also need to complete the College Board’s CSS/Financial Aid Profile. It will account for your home value and the cost of private school tuition for siblings.
As with anything in life, planning is critical to maximizing your financial aid award. Parents should start planning at birth by opening a 529 plan for the child and saving in this type of plan. One of the biggest no-no’s when it comes to financial aid planning is to have assets in the child’s name, this will drive up your family’s expected family contribution (EFC). 529 assets are in the parents’ name for the benefit of the child, not legally in the child’s name. 529s also are advantageous over UTMAs and UGMAs (minors’ accounts) in that the money always remains in the parent’s name. The child can’t decide to backpack across Europe with it in lieu of going to college. The child will take control of the UTMA or UGMA between 18 and 21 years of age depending on the state in which he/she lives; the parent has no control over it at that point.
Another key to maximizing your financial aid award is to minimize your income in the student’s junior year in high school. This is known as the “base income year” and it’s the year that factors the most in determining the family’s ability to get aid. Income or assets earned or gifted in this year are counted the most of any year. The key here is to either push or pull income into the previous or following year. Such “income events” would include Roth conversions, exercising stock options, receiving bonuses, drawing down retirement accounts, etc. If you’re self-employed, try to load up on big purchases, such as office equipment, cars or anything else significant. For those who aren’t self-employed, consider pre-paying real estate taxes or any other itemized deduction that will bring down your income for that “base income year.”
Another benefit for the self-employed applicant is the ability to shift income to their kids by hiring them to perform odd jobs around the office. Make sure you legitimize the transaction by paying market wages and documenting what the child is doing. Another benefit is that parents aren’t required to pay payroll taxes on these payments assuming the child is under the age of 18.
A big portion of the EFC is also based on the amount of savings you have (ignoring retirement accounts, such as IRAs and 401ks). One option is to liquidate your savings to pay down any consumer debt you have, including credit card balances, car loans and home equity lines. This will help with your EFC and reduce some debts at the same time.
Most people assume that they make too much to receive financial aid, but depending on which college your child attends, there’s usually something available for the higher-cost university. There is no better way to find out than to utilize The College Board’s EFC calculator; it will give you a good idea.
College can be a fantastic investment for a family. Just be sure that, at the end of the day, you weigh the cost versus benefit of potentially going into debt to finance your son or daughter’s “best four years of their life.” Your child has a much longer life to live and the ability to pay for the costs associated with his or her education, so never save/spend for college to the detriment of your retirement planning. Take care of yourself first and then focus on paying for college. Contacting your Redwood financial advisor is an excellent way to help with these types of decisions.
Shawn Meade CPA, MS, CFP®
Partner, Senior Wealth Manager