Last week we offered our first client workshop centered on
college savings plans and understanding the financial aid application
process. We had a good turnout, and a
big thank you for all who attended.As the FAFSA (the required form to apply for federal financial aid) deadline approaches, I thought I would take a moment to review the aid programs that are available, as well as discuss a quick overview of the tax-advantaged savings methods. I think it is important to realize that many of the aid programs are created for those who need it the most. Middle class families are expected to be able to contribute a significant portion toward the cost of tuition when it comes to these programs.
Aid Programs
Pell Grant—the Pell Grant is entirely needs-based. It is free money, meaning that it does not to be paid back in the form of a loan. It is only available to undergraduates.
Stafford Loan—the Stafford comes in two varieties: the Subsidized Stafford loan is entirely needs-based and the interest does not start accruing until schooling is complete. With the Unsubsidized Stafford, loan interest begins accruing at grant. It must be repaid in 10 years, and payment begins within 60 days of final disbursement.
PLUS Loan—the
PLUS loan is a loan entirely dependent on the parent’s credit score. These tend to be at higher interest rates.
Federal Supplemental
Education Opportunity Grant—the FSEOG is only available to those families
with a low expected family contribution.
It is only paid out if the funds are available (whereas the Pell is not
limited in the funds that are paid out).
Work Study—work study provides on or off campus employment
to pay for the cost of tuition.
Perkins Loan—Perkins
loans are available to families with exceptionally low expected family
contributions. The school acts as the
lender with very low interest rates.
These loans are awarded on a limited basis
Savings Programs
Prepaid Tuition—This
program allows you to pay for college tuition at today’s cost. The advantage is that you are able to lock in
today’s cost of tuition for future attendance.
The disadvantages are that your return on investment is caps at the
tuition inflation rate (which is not a bad return as compared to recent years);
if the child receives a scholarship, then only your principal investment is
re-paid; and the school or school system you pre-pay may not have a program
that is strong that matches up to your child’s interest.529 Plan—This account allows saving of after-tax assets in a tax-sheltered account. Assets can be withdrawn tax-free if they are for qualified educational expenses. The contributor retains control of the asset if the child decides not to go to college, and can re-assign the account to another beneficiary.
Coverdell Educational
Savings Account—The tax benefits of the Coverdell ESA are similar to the
529 plan, however annual contribution totals for these accounts are much lower,
and donors are phased out of contributing with modified AGI of $190k-$220k (MFJ)
and $95k-$110k (other filing statuses).
Coverdell ESA funds can also be used for private elementary and
secondary school.
Custodial Accounts—Funds
that are established under the fiduciary control of an adult, but taxed at the
rate of the child. Unfortunately, these
accounts are considered an asset of the child—a significant negative difference
when applying for federal financial aid.
These accounts can sometimes be subject to “kiddie” tax—pulling them
back into the parent’s taxable rate.
These funds become the full property of the child at the age of
majority.
Planning for education funding is a very important goal-based part of being
fiscally fit. If you plan to help your
child by contributing toward the cost of their education, but have not ear-marked
funds to do so, this can have a severe affect on your other financial planning
goals—specifically retirement savings. A
popular funding tool for college expenses has become the Roth IRA; because you
can access these funds prior to 59 ½ if they are for qualified educational
expenses. The problem with doing this is
that you are eating into funds that you may have previously designated as
retirement assets. Just as with other
financial goals, the rules for college savings are start early and stay fit.
