How to Pay for college, reduce Taxes and increase Financial Aid!

Paying for College
1

<p>I need help deciding how best to Pay for college, reduce Taxes and increase Financial Aid!<br>
I become more frustrated by our tax codes and the complexities of College Financing options by the minute!!!! Here's my situation in a nutshell:</p>

<p>I am married and we have 4 children ages 13, 15, 17, 18. The oldest is a freshman at a private 4 year college. Cost is @ 22K/year. They are receiving @ 6K in scholarships from the college. We received NO State financial aid this year and the college accepts NO Federal Student Aid (PELL or LOANS). We own our own home which is valued at 230K with @ 80K equity. I contribute 6% of my salary to my 401K at work and then to a ROTH/Trad. IRA as money permits. 2009 AGI was @ 69K.</p>

<p>I am in the process of deciding how to pay for the next semester. I want to try and maximize our PA State Financial Aid while lowering the amount of taxes we pay and increasing the value of the savings we do have.</p>

<p>Available funding for all kids at this point:
1. 529: @ 42K total (@ 30K in interest). 17K in daughter’s name (don’t think that matters)
2. Coverdell ESA: @ 17K. I transferred my oldest daughter’s ESA to her 529 last year since I read that it would be considered my asset in the 529 as opposed to my daughter’s in the ESA.
3. Savings Bonds: 36K – only 3K eligible for Education Expense Tax free interest. I just redeemed the only one that matured in 2009 for a total of $4,300 ($3600 in interest). I read that we could save some tax by cashing in the bonds that are in the children’s names before they turn 18?</p>

<p>Total: @ 100K, but Bonds are also our emergency fund (and to be invested for retirement).</p>

<p>Funding for my current student:<br>
1. College’s Loan via a large national bank in the region: 2.5% with a co-signer or 3.5% without co-signer. No deferred payments.
2. Worked last summer and is working on breaks. Hopefully will get a job on campus next year.</p>

<p>My questions are:</p>

<ol>
<li><p>What order should I use these bonds/529/Coverdell ESA to pay for college?
a. I’m getting stuck on whether it would be best to spend all of the 529/ESA money first so that my assets are lower and thus they’d qualify for more student financial aid.</p>

<p>b. Would it be best to use the bond money or a Student loan and allow the 529/ESA/Bond monies more time to grow?</p>

<p>c. Would it be better to spend down the current 529/ESA accounts and wait to use the Savings Bonds if necessary?</p></li>
<li><p>What are the best strategies to lower our EFC to increase chances for Financial Aid using the FAFSA for PHEAA and Institutional Method for college?</p>

<p>a. I read an article about (and have some friends that did this) taking out a Home Equity Loan and putting it into an Annuity to move includable assets into a non-includable asset. (Does this apply to Institutional method only?)</p></li>
</ol>

<p>Thanks for taking the time to read this and for any and all help!!!!</p>

2

<p>A 3rd question:</p>

<ol>
<li> What should I do with this Savings Bond money I just cashed? 529 (Could put into a Money Market fund and use to pay this next semester with to get a PA Tax deduction, IRA, liquid?)</li>
</ol>

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<p>“Paying for College Without Going Broke” Princeton Review 2011 Edition.</p>

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<p>Thanks SLUMOM. </p>

<p>One new thing I just learned from the college website - they participate in a 529 Plan that allows you to lock in college costs at today’s prices! The Private College 529 Plan at <a href=“https://www.privatecollege529.com%5B/url%5D”>https://www.privatecollege529.com</a></p>

<p>Has anyone heard of or used this? Sounds like a Win/Win now that my kid’s going here… Even though their prices don’t and won’t increase too much over 3 years time…</p>

<p>I just read this though, so probably not much of an option for this child, but maybe for the next:</p>

<p>Redeeming tuition certificates</p>

<p>Tuition certificates purchased through Private College 529 Plan that are held at least 36 months will be honored for tuition and required fees at any participating institution. Once your child is accepted and enrolls at a member college, you can redeem your tuition certificate(s).</p>

5

<p>Some random thoughts:</p>

<p>Your 100K in bonds only adds 5.6% ($5600) to your FAFSA EFC. At your income level, it seems prudent to have funds relatively liquid for emergencies rather than moving them to a 529 where taxes and penalties would be assessed if the fund had to be withdrawn for emergencies. In addition, that same 100K in a 529 would have the same impact on your EFC.</p>

<p>Perhaps you could redirect some of your 401k investments to 529s.</p>

<p>As a PA resident, you have some tax incentives to contribute to a 529 plan.</p>

<p>

</p>

<p>As far as the order of spending, in general it’s best to spend student assets down first (assessed at 20% for FAFSA) and then parent assets.</p>

<p>Home equity loans are very difficult to obtain these days, so don’t count on that.</p>

<p>With more children in your family coming along for college, you need a longer-term strategy for paying. Here’s a thread with one such strategy:</p>

<p><a href=“http://talk.collegeconfidential.com/parents-forum/148852-what-ive-learned-about-full-ride-scholarships.html?highlight=momfromtexas[/url]”>http://talk.collegeconfidential.com/parents-forum/148852-what-ive-learned-about-full-ride-scholarships.html?highlight=momfromtexas&lt;/a&gt;&lt;/p&gt;

<p>I have invested in an i529 for S2, class of 2014. The list of colleges that participate is quite comprehensive, but of course there’s always the risk that your kids won’t attend one that’s on the list. As you noted, the funds need to remain in the account for 3 years before they can be withdrawn to pay tuition, so you might have missed the window for your freshman daughter. You can liquidate the fund if your child doesn’t attend a participating institution, and roll the funds over into a regular 529. Depending on your outlook for inflation, it can be a very good thing to lock in a percent of tuition in today’s dollars.</p>

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<p>Thanks vballmom. The 100K is not bonds only but ALL 529, ESA and Bonds together.</p>

<p>The student doesn’t have any assets (we transferred her ESA to her 529 before she started) other than a few small bonds which aren’t an asset until cashed - and since they won’t qualify for the education interest free tax, we’ll probably give them to her after she graduates.</p>

<p>The question still comes down to the order of these: Bonds, 529, or Coverdell ESA</p>

<p>Any ideas on strategies to lower our EFC? I’m thinking that using the current 529 would reduce our assets and thus help. </p>

<p>Also, when I report 529 assets for my current college student, should I list those where the other children are the beneficiaries?</p>

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<p>

</p>

<p>Since these are all parent assets, spend down the one that returns the least as an investment. If the 529 is age-based and invested mainly in cash, it’s probably only returning .5%/year or so.</p>

<p>

</p>

<p>Make any planned major purchases to spend down your savings prior to filing FAFSA. If you don’t have any, there’s not a lot more you can do. The annuity plan you mention is one of the few ways to move reportable assets into a non-reportable category, but should only be done after you have a comfortable fund for emergencies and won’t otherwise need the cash to pay for college.</p>

<p>

</p>

<p>Yes, all parent-owned 529s must be reported for your current college student, since the beneficiary can easily be changed. These funds are considered a pool available to all children, not just the named beneficiary.</p>

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<p>529 is from AmericanFunds. I will liquidate the High-Income Trust Fund first since Bond funds seem to be going down in value as rates increase… The other funds we have are: New World, New Perspective, SMALLCAP World, Income Fund of America, and American Mutual Fund. If anyone is familiar with the American Funds, I’m open to suggestions for this next year’s allocations!</p>

<p>vballmom, do you know of any reputable paper/discussions of how and why to use Annuities for this purpose?</p>

9

<p>I can’t speak to the specific funds although you can check their ratings on Morningstar to see if they’re cost- and tax-efficient. </p>

<p>Here’s what I understand your assets to be:</p>

<ol>
<li>529: @ 42K total </li>
<li>Coverdell ESA: @ 17K</li>
<li>Savings Bonds: 36K
5K from somewhere else, maybe I missed it
100K total</li>
</ol>

<p>Your only discretionary assets are the 36K in bonds plus the 5K (cash?), assuming you don’t want to pay penalties for cashing out the 529s and ESA for unqualified expenses.</p>

<p>You will have an asset protection allowance of around $50K, depending on the age of the older parent. So your effective assets for FAFSA are the remaining $50K, which adds $2800 ($50K x .056) to your EFC every year.</p>

<p>Maybe I’m just too conservative, but tying up $36K in an annuity, where you don’t have easy access to it, in order to possibly lower your EFC by $2800 per year just seems risky to me, especially with 2 more children entering college in the next couple of years. Where is your emergency fund in that scenario? What happens if you lose your job/have a medical issue/experience a natural disaster that damages your house or car?</p>

<p>Need-based financial aid is great in theory, but in practice it’s not a very good safety net for middle-income families who have children to put through college. Lowering your EFC does not necessarily result in a one-for-one increase in the funds offered to you by the Fed gov’t or your childrens’ colleges.</p>

<p>A better focus might be on how to increase your income. Is your wife working? Can your kids get jobs to save up money for their college expenses?</p>

<p>As far as annuities, they are excluded from reporting for FAFSA, and so some families consider them as a way of sheltering assets. I’d suggest you google “variable annuities” to get more information on annuities in general, to see if you think it would be appropriate for you. They can be a legitimate part of an overall financial plan, but should be looked at in the big picture, not just as a way to lower calculated EFC. Here’s one article:</p>

<p>[What’s</a> Wrong With Variable Annuities - Personal Finance - Retirement - SmartMoney.com](<a href=“Personal Finance Advice - Personal Financial Management - MarketWatch”>Personal Finance Advice - Personal Financial Management - MarketWatch)</p>

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<p>The other thing this family needs to consider. MOST colleges do not guarantee to meet the full need of accepted students. Most colleges will not award this family ALL of the difference between the Cost of Attendance and the family contribution. </p>

<p>Personally, I think they need to have available assets in case of an emergency AND if they need to fund a financial gap in funding for college…which is HIGHLY likely.</p>

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<p>Why wouldn’t a school accept Stafford loans?
Is this school accredited?</p>

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<p>Grove City College is a very selective school and is consistently at the top of the list in National Educational Rankings: <a href=“http://www.gcc.edu/rankings_1.php[/url]”>http://www.gcc.edu/rankings_1.php&lt;/a&gt;&lt;/p&gt;

<p>However, they accept no federal aid of any kind, including federal student grants and loans, in order to avoid federal regulation and preserve the integrity of its mission, which includes keeping operating costs low. Following the landmark 1984 U.S. Supreme Court decision in Grove City College v. T.H. Bell, Secretary of US Dept of Education, Grove City College withdrew from federal student grant programs. Grove City withdrew from federal loan student loan programs in 1996 and created its own private loan program in 1998. Grove City College explanation here: <a href=“http://www.gcc.edu/Quick_Facts___Figures.php[/url]”>http://www.gcc.edu/Quick_Facts___Figures.php&lt;/a&gt;&lt;/p&gt;

<p>or Google about the 1984 Supreme Court Case - Grove City College vs. US DOE</p>

<p>They have made up for the Federal grants independently since the 1984 case! They are great financial stewards of the funding they are entrusted with!</p>

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<p>vballmom and thumper1 - I really appreciate the great advice! </p>

<p>On the income, yes, my wife works a P/T job close to home at a small office which is flexible and helpful for her to manage the various kids’ needs. She could obviously earn more by working more hours or at a job she doesn’t enjoy as much or further from home - it’s a balancing act. She says I need to be the one to work on this area and she’s probably right. Either of us could also try to work for a college. We will go to work on this!</p>

<p>My daughter does work and is also considering being an RA or take another job at the school which would also help pay for her costs. We’ll be requiring that the other kids job monies also be put away to help pay for college!</p>

<p>On assets, I just realized I put some of them in the wrong place - sorry for any confusion!</p>

<ol>
<li> 529: @ 42K total. 17K in daughter’s name (don’t think that matters)</li>
<li> Coverdell ESA: @ 17K. I transferred my oldest daughter’s ESA to her 529 last year since I read that it would be considered my asset in the 529 as opposed to my daughter’s in the ESA</li>
<li> Savings Bonds: 38K (@ 26K in interest) – only 3K eligible for Education Expense Tax free interest. I just redeemed the only one that matured in 2009 for a total of $4,300 ($3600 in interest that I now have to claim!) sitting in savings account. I read that we could save some tax by cashing in the bonds that are in the children’s names before they turn 18?</li>
<li> Liquid in Savings: 7K</li>
</ol>

<p>Total: @ 104K</p>

<p>Discretionary: the 38K in Bonds left (after the $4,300 I just cashed in) are not visible assets until cashed - so it’s more of a tax issue and possibly is the asset that meets your requirement of “spend down the one that returns the least as an investment.”? However, 4% interest sometimes looks pretty smart these days! Also, as part of our Emergency Fund - you can’t get close to that rate in any savings account these days !!!</p>

<p>I will study the Variable Annuity topic - thanks for pointing me to some credible sources and for your own input - you sound right to me, but it’s a conversation starter with our financial adviser at least!</p>

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<p>However, they accept no federal aid of any kind, including federal student grants and loans, in order to avoid federal regulation and preserve the integrity of its mission, which includes keeping operating costs low.</p>

<p>I see, thanks for the explanation. I guess you learn something new every day, even after 50 years on CC! ;)</p>

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<p>I think Grove City is the only college that doesn’t accept Federal funds, except possibly Jim Jones University.</p>

<p>Here’s a couple miscellaneous comments.</p>

<ol>
<li><p>You can redeem savings bonds in a parent’s name and put the money into a 529, and still avoid Federal taxes. There is an IRS form to fill out for the transfer. Savings bonds in a student’s name have no tax benefits for college. Most savings bonds are typically paying 2%, which is better than a bank, but still not great. </p></li>
<li><p>A 529 owned by a parent (with a student as beneficiary) has the most flexibility in how the money can be used, including allowing it to be transferred from one child to another, and allowing it to be used for room and board. Money can also be put into the 529 a couple months before it is paid out to a college, and still get a State income tax deduction (which is 3% in PA) for that year. PA’s 529 is run by Vanguard and is good, but Vanguard says their Nevada plan has a little bit lower fees and still is tax deductible in PA. Fees vary greatly between different 529 plans and can eat up earnings.</p></li>
<li><p>Spend any assets in a child’s name first for college expenses before spending funds in parent’s names. </p></li>
<li><p>If you expect to be eligible for PHEAA PA grants, encourage your kids to go to a college within PA. PHEAA grants cannot be used in New York, New Jersey and Maryland, and they are much smaller if used in other states. There is a chart on the PHEAA website of estimated grants based upon income, but the grants are typically are lower than listed because of budget constraints. Many middle income families are eligible for PHEAA grants who are not eligible for Pell grants.</p></li>
<li><p>Put any future retirement contributions into a Roth IRA. The principle in a Roth IRA can be withdrawn for college expenses if needed (only the withdrawal of earnings have a penalty). Therefore, it gives you the most flexibility in using money for either college or retirement. Also, Federal income taxes are probably as low as they will ever be, so it is better to put after tax dollars away now.</p></li>
<li><p>The PA. 529 program can be linked on the PA website with Sage Tuition rewards. It can result in a guaranteed minimum scholarship from a number of private colleges. The more selective colleges do not participate. The credits can be transferred from one child to another, so that the total ends up being worthwhile. For example, if one child has $4,000 of credits and another child has $4,000 of credits, it can be added together, and then there is a guarantee of at least $2,000 for each of 4 years in scholarships from a participating college.</p></li>
</ol>

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<p>Thanks Charlieschm!</p>

<p>[Q] 1. You can redeem savings bonds in a parent’s name and put the money into a 529, and still avoid Federal taxes. There is an IRS form to fill out for the transfer. Savings bonds in a student’s name have no tax benefits for college. Most savings bonds are typically paying 2%, which is better than a bank, but still not great. [/Q]</p>

<p>Like I mentioned, most of the bonds are Pre-1990 EE, so not eligible for tax-free interest!</p>

<p>[Q] Money can also be put into the 529 a couple months before it is paid out to a college, and still get a State income tax deduction (which is 3% in PA) for that year. [/Q]</p>

<p>Do you think it is worth putting the pre-1990 Bond money here anyway? I can put money into the Money Market fund with no sales charge (+ .051 % mgt. fee) if I’m going to take it right out again.</p>

<p>[Q] 4. If you expect to be eligible for PHEAA PA grants [/Q]</p>

<p>We weren’t eligible last year, that’s part of my question is what we can do to be more likely to qualify? Is there a way to figure it out using their EFC calculator? What is the formula and what assets are weighted heaviest?</p>

<p>[Q] 5. Put any future retirement contributions into a Roth IRA [/Q]</p>

<p>Instead of putting the recently liquidated bond money (or any for that matter) back into a 529, should I max out my ROTH first? We are investing the maximum employer matched amount in my company 401K - 6%. Roth contributions are pretty sizeable! I’d probably never be able to contribute to the 529 again!</p>

<p>[Q] Also, Federal income taxes are probably as low as they will ever be, so it is better to put after tax dollars away now. [/Q]</p>

<p>Great point that I did not realize! I was thinking of using the Trad. IRA to help offset some of the taxes we’ll owe from the cashed Bond’s interest income.</p>

17

<p>For our state’s 529 plan, funds only need to be in the account for 10 days before they can be withdrawn (and I think this is true in at least some other states as well). I have all of our 529 $$ in the “guaranteed option”, which yields almost 3% annually. Not too shabby. But the real benefit is that in our state, for a couple married filing jointly, up to $20,000 deposited in the state’s 529 plan is exempt from our state income tax of 5.5%!
So for each $1000 that gets funneled through our 529 plan (and it doesn’t matter how long it’s in there) we save $55 in state income tax - a VERY good deal.
We’re saving more than $900 on our state income tax for 2010, plus we make a little bit on the nearly 3% annual return on the investment. Even if the money just in there for a little while, it makes a few bucks here and there.
Every little bit helps these days!</p>