Parent Planning: Balancing Accounts and Assets
Get your kids involved as early as you can in college financial planning by including them in a monthly discussion about your money and theirs. This is a variation on the monthly money meetings you learned about earlier. You don't need to share your whole financial picture with them; in these college money meetings you'll focus on their accounts and the accounts you own that are earmarked for their college costs.
Financial aid generally takes three forms: grants that don't need to be repaid; low-interest loans; and work-study programs. As part of the college application process, you'll need to complete the Free Application for Federal Student Aid form that is universally known as the FAFSA. FAFSA information is used to calculate an expected family contribution, or EFC. Many families ignore the FAFSA form because they feel they make too much money to qualify for aid. Since most aid comes in the form of loans, completing the form regardless of what you expect the results to be is a good idea and a good learning experience for your student. Be sure your child fills out the form with information you provide; modern life is a process of paperwork, and it's time that your student is exposed to it.
Financial aid guidelines are likely to change, but there are a few things to keep in mind about accumulating assets for college costs:
It's okay to save for college. Regardless of financial aid treatment, anything you save in an interest-generating account is that much less you'll need to borrow, and then repay with generally low but not insignificant interest.
Spend the children's income and assets first. Student funds are counted at a higher rate than parents' assets where financial aid eligibility is concerned.
Pay off consumer debt. Credit card balances are not considered on the FAFSA. Paying them off reduces your available cash and saves on the amount of interest you will eventually pay on the borrowed funds.
Grandparents who would like to help pay college expenses should contribute to a 529 plan or to the parent, or wait until after graduation and then help pay down school loans. In financial aid terms, this equips the student to qualify for more aid than if the money were gifted to the student, increasing the assets that would reduce aid awards.
Don't completely deplete your savings in order to show fewer assets and therefore qualify for more financial aid. Annual salary and total income is a stronger factor in aid calculations anyway, and if you deplete your cash, you may get caught in an emergency. Most schools consider a means protection allowance that ignores the first $35,000 or so in parents' liquid assets.
Retirement and Home Equity
Fortunately, assets in retirement plans are usually not considered in the EFC calculation. Maximizing retirement plan contributions helps you prepare for retirement, saves income taxes, and helps you build assets that most schools regard as unavailable for college expenses. You'll have to report the retirement contribution you made in the year before you complete the FAFSA form, but don't let that stop you from saving.
Beware of organizations that charge large fees to help you qualify for more financial aid by transferring assets, by having the parent simultaneously enroll in college with no intention to attend, or by other fraudulent schemes. Check Appendix B for links to resources to help you research the financial aid process for free.
Home equity is also generally not considered available for college costs by most schools. It's wise, though, to keep equity available to you by opening an equity line of credit that can be tapped if you need it. Open the line and have it available, but don't take an equity loan and hold the cash payout in an account. That cash can be considered as part of your college tuition contribution, hurting the size of the aid award.