Sending Your Child Off To College: Part 1: Need-Based Financial Aid Planning, College Planning, And Asset Protection

Michael Feinfeld., Esq. and Corey Lederman on July 14, 2015

Here we’ll explore how your assets and income affect your child’s ability to receive financial aid and strategies to maximize the amount of financial aid offered.

COLLEGE PLANNING

There are two primary tax privileged college savings vehicles: the 529 plan and the Coverdell ESA.

The 529 College Savings Plan (“529 Plan”)

This college savings plan provides some of the most generous tax benefits for parents and students.
It’s very powerful because an individual can give up to $70,000.00, per beneficiary, either gradually or all at once in a lump sum (couples can give double this amount, i.e., up to $140,000 per beneficiary). These savings plans grow tax-free and no taxes need to be paid on these assets (if they are used for qualified education higher education expenses: tuition and certain amounts towards rent and living expenses. Unfortunately, expenses, such as student fees, computers, transportation to and from school and student loans, etc., may not be paid for with a 529 Plan).

These accounts are easy to setup and are reasonably inexpensive in relation to other types of investments. Furthermore, a 529 Plan properly titled in the student may still be treated as the parent’s assets, which has favorable implications for financial aid purposes.

The Coverdell Education Savings Account (“Coverdell ESA”)

This is an alternative tax privilege account that acts more like a brokerage account, which is less limited than the types of investments afforded to 529 Plans. Additionally, in contrast to the 529 plan, the proceeds in a Coverdell account can be used for both qualified primary and secondary education costs. However, contributions are limited to$2,000.00 per year per student, and those who earn amounts greater than $110,000.00 individually (or $220,000.00 for couples) a year can’t contribute to the Coverdell account.

COLLEGE FINANCIAL AID: NEED-BASED AID

When applying for need-based student aid, grants (the aid not required to be repaid) are offered to students based upon a financial calculation of the ability of the student and their parents to contribute to the tuition, the fees, the room and the board, and the books.

Make sure you apply as early as possible for aid. Aid is given out as it is applied for and completing your application early can increase your child’s chances of getting the available aid.

Expected Family Contribution

The Expected Family Contribution (EFC) is used to determine an applicant’s eligibility for federal, state and institutional grant aid, and is calculated based student and parent’s financial information reported on either the Free Application for Federal Student Aid (FAFSA), or the College Scholarship Services Profile (CSS Profile).
Strategies for Maximizing your Student Aid

Generally, if your income is over $50,000.00 in a year, you’re going to have to contribute more to your child’s education than somebody who’s earning $50,000.00 or less (it’s a graduated schedule).

If you’re just about at the $50,000.00 a year level, then reducing your income can increase your child’s eligibility for aid. This is generally easier when you have a family-run business or you are self-employed because you can control what you get and you can control when your bonuses are.

Asset Protection: Maximize Your Contributions

If you arrange your assets in the right way, you may be able to shield more of your assets from being included in the calculation of your expected contribution for financial aid. Also, you can help ensure that contributing to your child’s education will not impoverish you when you retire.

First and foremost, contribute as much as possible to college saving plans like 529 Plans and Coverdell ESA’s.
Additionally, maximize your contributions to your retirement accounts (401(k)’s, IRA’s, and qualified plans). Retirement accounts are beneficial because their principal values are not reported on the FAFSA and are not included in the aid calculation formula on the CSS Profile (prior year’s untaxed contributions are reported, but not for Roth IRA).

Once your child actually starts attending school though, consider contributing to a Roth IRA. Roth IRA’s may further shelter your assets because the after tax contributions are not reported as untaxed income. Principal amounts even though they may be reported, generally will not figure into the amount of need-aid your child may receive.
Also, retain life insurance with cash values for yourself and potentially buy some for your child in their own name. The cash values are typically not reported.

Furthermore, it’s a good idea to pay down your consumer debt by the year prior to your child’s entering into college. So, pay off your credit cards, your auto loans, and things like that. This is important because it not only reduces your assets, but also reduces the bills you’ll have to pay during college.

Your need to make those payments is not going to be taken into account when your child’s financial aid package is considered.

Additionally, you should consider the beneficiary designations on your own life insurance policy in relation to your college-age children. If you pass away and your spouse or your child receives insurance money, that may (will likely) affect your child’s financial aid. If this occurs the financial aid department should be consulted to determine whether an adjustment may be made under these circumstances. Additionally, if the surviving parent inherits the money, the child should consider taking a year off school so the proceeds are not counted as income but will be counted solely as assets of the parent. Proceeds could also be used to pay off existing debts (like credit cards or auto loans) to increase available cash to the surviving parent.

This article is for general information only. It does not constitute individualized legal advice, and you should consult with a licensed attorney to determine how these general statements of the law apply to your particular circumstances.

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