Just because your child is about to enter college doesn’t mean you’ve run out of time to save money.
It’s a common myth that if your child is about to head to college or is already in college, you’ve reached a point when the only thing left to do is take out a few large loans and get ready to bear the burden of tuition.
According to top college funding planners, that is simply not the case.
Parents often don’t realize that with the proper financial planning, they can save significant amounts of money even while their child is still in college. The following are a few basic tips to save money in the late stages of college planning.
Financial Aid
Apply for financial aid as early as possible. The standard Free Application for Federal Student Aid (FAFSA) forms are the first and most important to complete. Getting into the mix early increases your chances of being awarded “first come, first served” financial aid packages, and being prompt increases your chances at better awards and loans, reducing the amount of out-of-pocket costs passed on to you.
Make sure you go over the financial aid forms and regulations with a financial professional. Anyone who has tried to navigate through the forms or the pages of rules and guidelines can tell you it’s more than a little complicated. Having someone help you through the process doesn’t just ease the burden financially; it also takes away a lot of stress and anxiety.
Your FAFSA forms typically take a few weeks to process, which is another reason to plan ahead. Once your financial need is determined, schools you’ve applied to will offer a financial aid package. The package can include various ways to pay for college, including loans, grants and any scholarships they have awarded your child.
A little research can go a long way in saving you money for college. If your child is considering multiple schools, determine which schools give out more aid and scholarship money. Make sure your child applies to at least two schools where he or she is in the top 25 percent of the applicants. This can be found by doing some basic research on the grade point averages of previous freshman classes.
Relying too heavily on high school counselors when filling out financial aid forms is a common mistake. Counselors may be responsible for helping hundreds of students and often cannot provide the personal attention each individual student needs. That’s why a trusted college planner is best.
Gifting and Shifting
Student income and assets factor more heavily than parental income in the Expected Family Contribution (EFC), which is a figure subtracted from the student’s estimated costs to determine the amount of federal aid awarded. Twenty percent of the student’s savings, investments, business interests and real estate count in determining the EFC, while no more than 5.64 percent of their parents’ assets are taken into account. Similarly, 50 percent of student income above $6,570 counts versus 22 to 47 percent of parental income above $25,040. (The exact percentage is based on the parent(s)’ total income.)1,2,3
Financial gifts count as income. So, if a student’s income exceeds $6,570, 50 percent of a grandparent’s gift will raise the student’s EFC. To avoid this, grandparents can wait until the student’s junior year to help out. Thanks to the prior-prior year accounting, their gift will no longer apply.
On the flip side, gifting appreciated assets (up to $2,200) to your child may mean they are taxed at a lower rate than yours because of the Kiddie Tax. The Tax Cuts and Jobs Act passed in 2017 changed the rate used when calculating the Kiddie Tax. The SECURE Act, passed in 2019, instituted added changes that will go into effect starting with the 2020 tax year.4
Because of the complex factors involved, it’s best to consult a tax professional before gifting or shifting assets.
Employment
If you own a small business or rental property, you can use that property to your advantage by employing your child. Your child will learn the value and responsibility of work and receive a wage. As a small business, you can offer a specialized Employer Education Assistance program, which allows you to give up to $5,250 a year tax-free to employees who are attending college.
No matter what stage in life you’re at, it’s never too late to save for college. With some simple strategy and some help from your financial services professional, you can find ways to reduce college costs and increase the ways to pay for it.
1https://ifap.ed.gov/fsahandbook/attachments/1819FSAHbkAVGCh3.pdf
2https://payfored.com/efc-calculation/#
4https://www.savingforcollege.com/article/congress-passes-kiddie-tax-fix
Written by Securities America for distribution by Eric McGinley
Securities America and its financial professionals do not provide tax advice. Please consult with your tax professional regarding your individual tax situation.
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