Planning College -- the financial side

Parents Forum
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<p>Two parts to this, The Long(-winded) Part and The Short Part. Skip to the short part (below) if you don't want all the background/musings/etc. :-)</p>

<p>The Long(-winded) Part
Since I'm already on record as a plannerista (<a href="http://talk.collegeconfidential.com/parents-forum/468215-if-you-had-do-all-over-again.html%5B/url%5D"&gt;http://talk.collegeconfidential.com/parents-forum/468215-if-you-had-do-all-over-again.html&lt;/a&gt;) and have confessed to having a worksheet with eight (yes, eight) different spreadsheets in it for tracking high school/college stuff for my HS freshman S (I'm old and forgetful, so if I don't write it down...), of course the next subject on my mind college-wise is the financial side. </p>

<p>(I won't mention the different college visiting itineraries I've already mapped out on Mapquest, no, no, no! :D )</p>

<p>I read through many threads on the Financial Aid forum and was inspired to run the FAFSA to determine my EFC; I know that the number will change over the years, but at least I have a ballpark at the number I have to meet. </p>

<p>EFC is about $15K. I expect to be able to meet this through a combination of 529 funds, savings bonds purchased when S was a small tot, some other savings, and funds that will be freed up by virtue of not having to pay for CTY anymore. Our household budget is very tight; it's unlikely there will be much in the way of additional funds coming from this parental unit for college.</p>

<p>S's dad and I are divorced and are on good terms, but exH does not plan, won't talk about (and is naive about) college finances, and though I think he may contribute to the cost of college, I have to go with what is under my control (however little it may actually be under my control!).</p>

<p>ExH, H, and I are all in our 50s, so taking out significant loans to help S in college is contraindicated by looming retirement. (Fortunately, the EFC will cover tuition at the local flagship state U, though other schools may certainly be an option.)</p>

<p>S will graduate from HS in 2011, so the FAFSA will be filled out based on holdings/income in 2010. </p>

<p>I live very cash-poor, keeping most of what money I do have (which isn't much!) in retirement accounts. However, I currently have a mutual fund that isn't sheltered in any way, as IRAs and 529s are, that could be used for education. I am thinking it might be a good idea to move that money to an IRA in the next couple of years, before 2010. If this money is needed for education, the penalty for withdrawing it before age 59.5 does not apply (<a href="http://www.irs.gov/publications/p970/ch09.html%5B/url%5D"&gt;http://www.irs.gov/publications/p970/ch09.html&lt;/a&gt;). Furthermore, that money is not considered an asset for EFC calculation. Do I have that correct? An alternative is to put it in the 529, but that limits the use of that money to education expenses. Putting it in an IRA provides greater flexibility, yes?</p>

<p>Similarly, H has a CD that he brought into the marriage (we married last year), and I think he should move the funds over the next couple of years to an IRA; he and I both consider that money his, not available for education expenses for S. (H is a bit behind on retirement savings anyway.)</p>

<p>The amount of money in both of these accounts currently is not so much that it makes a significant difference in the EFC, BTW, but every little bit helps, of course.</p>

<p>The Short Part
Is it a good idea to move non-sheltered funds to a sheltered account, in this case an IRA, before the tax year used for filing FAFSA, given that early withdrawal penalties are waived when withdrawing from an IRA for education purposes?</p>

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<p>Let me commend you for doing this stuff in advance!!</p>

<p>If you put that cash into retirement accounts you are correct in that it won't be counted as an asset.</p>

<p>BUT, you can't assume that your EFC is all you will have to pay for college. If your child is willing to go to the school that would be covered by EFC amount and stafford loan, then by all means tie up the cash. Also, I'm assuming you know that your current husband's income goes into the fafsa calculation, your Ex husband's would ALSO go on the CSS profile (depending on if the school your child was applying to asks for that form). Yes, it would like having 3 parents paying for college.</p>

<p>you can only use penalty free withdrawals from IRA for tuition, fees and books, NOT room and board</p>

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<p>Owlice - </p>

<p>Happydad and I are in the process of shifting cash into retirement savings for the very reasons you describe. It has taken me a very long time to convince him to maximize his 401(k) but finally last fall after I ran a preliminary FAFSA calculation I was able to do so. I only wish I'd had the sense to run a FAFSA estimator sooner!</p>

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<p>As others have noted FAFSA EFC is not necessarily CSS Profile EFC or respective schools interpretation of info gathered from CSS Profile/FAFSA. And current H's income + ex H is also figured in, just as above poster noted, 3 sets of income and assets.</p>

<p>Also as seen in the FA forums many, many students were gapped by LARGE amounts between figured need and the EFC. If FAFSA EFC is $15 K, most grants will institutional and not Federal (Pell, SEOG, WS).</p>

<p>Good luck. </p>

<p>Calmom , sybbie and curm would be good to get advice from about all this as well.</p>

<p>Kat</p>

<p>Kat</p>

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<p>Thanks, all!</p>

<p>sueinphilly, I've been afraid to run the EFC calculator. Was finally emboldened to do so after reading so much on the financial aid forum!</p>

<p>Penalty-free withdrawals from an IRA can cover room and board, so long as the student is a half-time or more student, according to the IRS page at the link above. "In addition, if the student is at least a half-time student, room and board are qualified education expenses."</p>

<p>Regarding CSS, that's a bridge we'll have to cross when we get closer to college. I won't know what my ex will or will not do for the college effort until he does or doesn't do it.</p>

<p>happmomof1, where are you in the whole college thing? Is your 1 currently in college, or in HS? </p>

<p>I haven't maximized my 401K yet. I put in enough to get the match, which is a nice amount, but don't have enough play in the budget to put in more, alas!</p>

<p>katwkittens, yes, S may have a gap. I can't do too much about that. I have only so much money, after all. The budget is pretty tight, and if I could put away more, I would. We have to work with what's available and make the wisest choices we can with what we have.</p>

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<p>Good for you, Owlice, for being so planful. That's inspiring (spreadsheets, etc.). It's good to get a feeling of control over some things, that way.</p>

<p>I should pull out the spreadsheets, too. Right now our plan...I go back to work!! </p>

<p>Good luck!</p>

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<p>I do see that now on page 53 of IRS pub 970. thanks for the clarification about room and board</p>

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<p>Jolynne, the spreadsheets... are because, paper-wise, I'm not (<em>cough</em> <em>cough</em>) always as organized as one might need to be...! It's kind of "one-stop shopping" for all high school data, or will be, anyway, as he goes through HS. I haven't even started on financial spreadsheets yet!</p>

<p>I have a notebook with 529/college-money investment statements in it with a page in the front on which I write down each year what the investments are worth in their respective columns. On the back is the one column for the 529 my exH has (into which the state-mandated child support goes; it's not very much, but is something). (Okay, this is the one place where I am sort of organized paperwise; nowhere else in my life, however...) That page is what I was looking at to determine whether I'll be able to meet the EFC.</p>

<p>sueinphilly, I had to look for that bit about the room and board; I'd heard something to that effect a while ago, so was looking for it specifically.</p>

<p>~~~</p>

<p>Added: I want to add that it was a HUGE relief to find that I could, at least, meet the EFC. I have always saved for S's college, but many times, it was very little. In the days of his babyhood when I was a SAHM, for example, it was $25/month scrounged from the grocery budget and used to purchase a $50 savings bond. I always feel as if I'm just not saving enough, that S wouldn't be able to go even to a school in-state. I want so much for him to not have huge educational debt when he graduates! So though it's still not much, what I've saved, at least it will be enough to comfortably cover in-state tuition, and to cover the anticipated EFC. I'm SO glad I ran the numbers! More is always nice, of course, and sure, there is likely to be a gap if he goes elsewhere, but at least I don't have to wake up sweating in the middle of the night over this!!</p>

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<p>Based on what I have seen from this process - my conclusion is that "don't save any thing for college". </p>

<p>One student whose parents started an account for her since 2nd grade. She will go to an Ivy school and the account has enough to pay for full COA for 4 years. </p>

<p>Another student whose parent saved a little. She will go to a top school where COA is ~$54,000. Her family will pay less than $20K a year. </p>

<p>The student who saved will pay over $200K and the other wil pay about 1/3 of that. </p>

<p>Why save?</p>

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<p>The reason to save is because your financial aid is based not only on your assets (or lack therof) but also on your income. The other reason is that, as noted above, many schools gap your EFC and actual cost. Not all schools give good aid, not all schools give merit aid, not all schools are need blind.</p>

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<p>owlice</p>

<p>I recommend Paying for College Without Going Broke by Kalman Chany. A new edition is available every October.</p>

<p>It talks about Retirement Accounts and when to cash in EE Bonds.</p>

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<p>Saving is never a bad idea; kids whose parents never saved may not get into the schools that give great aid. They may be paying for college entirely in loans. If parents can save $80,000 that usually gives the kid an option to go in-state public for four years and graduate debt-free. And only about 5% of parent assets are counted for FA.</p>

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<p>I just want to add that you should run your EFC based on what you think your income will be 3 years from now & your age of older parent at that time. Also, factor in college cost increases of 3-5% for the next 3 years so what is 20K now, will be > 23K in 2011</p>

<p>And if you need to fill out the CSS profile, all bets are off :-)</p>

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<p>Good points, Sue. Also be aware that schools using the Profile have lots of choices of supplemental questions, down to what types of cars you own, when they were bought, and how much they cost. So don't just think you should spend down your savings so as not to have to show assets. Not a good idea!</p>

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<p>With W's enlightened approach to taxation on investments, (full deduction on losses, but reduced and limited taxation on gains) it would be advantageous to evaluate the alternative to tax sheltered plans. Also dividends are minimally taxed when held for longterm. </p>

<p>For gains: Two similar investments, one held in 529 and one held in nonsheltered investment. Obviously the nonsheltered will be taxed, but at a reduced amount when compared to ordinary income. The sheltered program will of course not be taxed but the tax difference between the two programs may be relatively minor. </p>

<p>For losses: Two similar investments, one held in 529 and one held in nonsheltered investment; The nonsheltered can reduce taxable income and save you in taxes at your marginal rate. The sheltered investment you are SOL. </p>

<p>You can run a simple scenario on any tax program and see the difference.
Looking for more cheese.</p>

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<p>
[quote]
Why save?

[/quote]
</p>

<p>Because no one has guaranteed aid to my kid. What fortune befalls one family with a different kid, in different circumstances, is no guarantee that that fortune will befall my family.</p>

<p>Because I want my kid to know that <em>I</em> value education enough to save to make his education possible.</p>

<p>Because I value self-reliance and planning, and because I want my kid to, also. </p>

<p>Because I want to give my kid the best start into adulthood I can, and that means an education and, I hope, no/low loans after graduation. There are many jobs that are important to society that are not well-compensated; if my son wanted to take such a job, I would like him to be able to afford to, rather than having to take a high-paying job to pay off loans.</p>

<p>Because I could die before my son starts/finishes college, and I want to make sure that, whatever else happens, there is money for his education. (Yes, I have life insurance, too, of course.)</p>

<p>Because I could have an accident that renders me unable to work, and I want to make sure there is money for his education.</p>

<p>Because his dad doesn't. </p>

<p>Because I don't know what kind of HS student my son is going to be. I can guess, but the chances are excellent that I'd be wrong, especially if I were to have started guessing at the time I started saving.</p>

<p>Because it's the smart thing to do, and I value smart.</p>

<p>Had I been able to save enough to provide the COA for any school he might go to, I'd be proud of myself for having done so and glad that I could do it, because it would mean that I had had enough money to do so, enough discipline to do so, and enough good fortune in life to do so, and each of these is reason enough to be happy and feel blessed indeed!</p>

<p>As it is, I am happy and feel blessed indeed that I have saved what I've saved. We have everything we need and many things we want; there are so many who are not nearly so fortunate. Life is good!</p>

<p>If no one hands S a free lunch, he won't have to go hungry. I'm delighted that's the case!</p>

<p>~~~~~~~</p>

<p>FresnoMom, thanks for the book recommendation! I have seen others praise it, too, and will get it from the local library, which has it! (Just checked online!)</p>

<p>sueinphilly, thanks for the suggestion; I recalculated. It's a little more, but it looks like I'll still be okay for the FAFSA EFC. (CSS, yeah, all bets are off anyway!)</p>

<p>twinmom, thanks; we'll be sure to impress CSS readers with our 10-year-old Honda Civic and 10-year-old Toyota Corolla, which will be even older then, if they last that long! :)</p>

<p>thisoldman, "W" and "enlightened approach" in the same sentence -- that's a first!! :D</p>

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<p>owlice -- I like the way you think.</p>

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<p>
[quote]
thisoldman, "W" and "enlightened approach" in the same sentence -- that's a first!!

[/quote]
</p>

<p>What do you get when you put light on an idiot? Enlightened Idiot. I have no love for this disaster of American upbringing. And a pox on Harvard and Yale for their gentleman's passing grade.</p>

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<p>owlice - well said, great attitude.</p>

<p>but, my 17 yo honda civic trumps your 10 year old one ;-)</p>

<p>Someday I will own a car from the current decade/millenium</p>

<p>Had my son told me he wanted to be a plumber or automechanic, I would have supported and helped pay for that training. But he's about as mechanically inclined as me, not so much. </p>

<p>Education = Priceless (not a guarantee of success, but a good start). I never had the chance to go to college, been self supporting (entirely) since the age of 17. Swore I wouldn't let that happen to my kid. And I will live cheaply and drive my old car to make that happen.</p>

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<p>owlice,</p>

<p>Thoughts about the IRA...</p>

<p>With a conventional IRA, you will have income to report in the year when you withdraw the money. That will feed back into the subsequent year tax return and corresponding FA forms and EFC. </p>

<p>You might want to consider using a Roth IRA, as it does not get reported on tax forms (either deposit or withdrawal). Don't know if Profile asks about withdrawal amounts from "tax free" accounts though. FAFSA does not. And if you are not on the edge of a marginal tax bracket change, the net effect in your situation will be neutral (pay more tax up front, less tax on the back end).</p>

<p>You also, in effect get to bury (from the EFC tax) more asset using the Roth IRA. If you put 4000 (I think at your age you can do 5K IIRC, but for this example we will assume that 4K is the max) in a conventional IRA and are in the 25% marginal tax bracket, you get back 1000 in your tax return that you then have to bury the next year. That 1000 that you need to re-bury comes out of the 4K that you would have been able to bury that year, if you understand what I'm saying.</p>

<p>So if your objective is to bury as much money as possible for the EFC tax, I would recommend a Roth IRA.</p>