Paying for College Without Going Broke, Part 2

Paying for College Without Going Broke, Part 2

 Spring is in the air and soon high school graduation caps will be too.

But it is never too early or late to plan for the next step in a child’s education career.

Deciding on a college or other post-secondary vocation school is based on a number of factors.  But it should be clear that this is as much a business decision as anything else.  You and your child are making a decision which will have a long-term impact on his earning power and your retirement.

How much are you willing to pay for a particular educational experience and under what circumstances? Regardless of whether you’re paying $50,000 per year or $5,000 per year, you should consider your child’s school choice with financial aid in mind.

In the initial article of this series, I mentioned ten specific ways to lower college costs.  These included such ideas as taking Advanced Placement exams to earn college credit, considering an in-state college, using the American Opportunity Tax Credit  formerly known as the Hope Education Credit, employing your child in your business or investment real estate business and encouraging your child to use the proceeds to fund a Roth IRA.

But even if you haven’t stashed a lot aside for expected college costs, there are strategies you can take to maximize the financial aid that your child may be able to receive.

Many parents mistakenly believe that they “make too much money” to receive aid.  Or they look at the “sticker price” of a private school and think that it is way too expensive to afford.  In reality most people never pay the full sticker price and with some planning ahead of time many can find ways to make even such private schools within reach.

Yet many would be surprised to find out that by speaking with a knowledgeable professional they increase their chances for an aid package that makes college more affordable and less stressful to their personal retirement plans.

Remember that the more time you have before your child or children begin college, the more options you have.  But even if college tuition bills loom on the horizon, there are things that you can do to be better prepared.

Expected Family Contribution:

Everything depends on the Expected Family Contribution (EFC) calculated from a review of income and asset documentation and the Free Application for Federal Student Aid (FAFSA) completed after January 1 of your student’s senior year of high school.

A particular formula is applied to this information to determine what income and assets are eligible from the family (including the student) toward the total cost of a year at college for everything from tuition and fees to room and board, books, supplies and travel.

Since the financial aid offer one receives is based on the income from the prior year, it is important to consider the impact of timing on one’s income and asset picture.   Colleges base their aid packages on a calculation of your ability to pay the upcoming year’s tuition on what you earned the previous year.  While it may seem unfair, it is the reality.  So this first year, called the “base year,” is the crucial one.

Ultimately then, your goal is to lower your EFC by employing strategies that lower your income or assets in the crucial base year.

Consider this:  If you own a business, you could increase your outflow for needed equipment that results in a lower net income.  You could delay your billings and collections to also lower your net income.  While a business owner needs to report the value of a business, the FAFSA form is not the place to brag.  The value of one’s business need only include actual cash on hand and tangible assets but not intangibles like “goodwill.”  This may help lower the value of your business and increase the amount your student may ultimately be eligible to receive.

On the other hand, maybe you’ve always considered starting a business or because of your job prospects this has become a necessity.  Don’t wait until the children have started or finished school.  By launching the business in the base year, you will incur expenses (including possibly depreciation on equipment) that will lower your reported income.

Even if you don’t own a business, you may have some control over the income and assets you report.

If your child will need a car, a computer or other school supplies, consider buying them in the year before completing the FAFSA.  Since credit card debt is not taken into account in the FAFSA, use extra cash instead to pay off these debts.  Another option might be to prepay property taxes or your mortgage which also provides you with an added tax deduction. All of these strategies will lower the cash on hand.

If you’re expecting a year-end bonus, then try to negotiate with your employer to defer receipt of the bonus into a non-base year.  By doing so, you’ll avoid having the colleges count this twice: once as income in the base year and then again possibly as an asset in your savings accounts.

It’s important to minimize assets held by the student.  So consider using savings or investment accounts held in the student’s name to acquire a car or computers or other needed supplies.  It’s also a good idea to dissuade grandparents and family members from giving cash gifts to the child.  In lieu of a gift to the student, a grandparent could direct the same amount of cash to pay toward the college tuition or fees. 

If anyone in your household receives any means-tested Federal benefit program aid (not including federal student aid), then the student may qualify for the Automatic Zero-EFC regardless of whether the child has any significant income or you or the student have any significant assets.   A person can also qualify if anyone in the household is a “dislocated worker” defined as meeting one of the following: being laid-off or receiving a lay-off notice or being self-employed but unemployed due to economic conditions or natural disaster.

And even if a FAFSA was filed and an aid package has been granted, you can appeal to the school’s Financial Aid Officer if you’ve lost your job.  While there may not be much that can be done for the fall semester package, it will put the college on notice that you may need more aid in the next year.

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