Paying for college--beware the traps

[daveshoe]

This will b my fourth year for filling out the FASFA for determining how much college is gonna cost for next year. Through dumb luck,my investments were in all the right places to maximize financial aid. Here are some common traps to avoid. 1. Before investing in a 529 plan,be aware that the amount in that plan counts as an asset,reducing college aid by about 5. 65% each year . By the fourth year the assets remaining are ''taxed'' at almost 25% 2. The money you put in a 401k at work [during the college years]saves you taxes, but reducees financial aid. [put it in anyway if you get a high employer match]3. An additional drag on the 529 plan is that when the student spends money from the 529 plan to pay for college,the aid eligibility for the next year decreases by 25% of the amount spent this year. 4. Never ''go cheap'' when you look at schools to attend. It is very possible that a bright student can get much more funding from a private school than a state funded college. 5. Apply to at least five colleges to get the best offers for financial aid. If the student is in the top 25% of applicants,and applies to five schools, his aid offer will be an average of 30% higher. 5. Know where to position parental assets so they do not count against you. Your house and a small business are two major places to look. 5. Assets held in the bank by students are like poison to financial aid--20 to 35% of their value will disappear when reported as savings

These are the major mistakes people make,but I have about 50 tips that could save tens of thousands in total,depending on income status. College aid money is a finite amount,but I was not embarassed to go for as much as possible when you cionsider that this money is freely given to qualified aliens as well as qualified US citizens.

This has worked so well for us that my daughter has already started a ROTH IRA at age 21 with two years to go in school.

 

[rbattelle]

TBy the fourth year the assets remaining are ''taxed'' at almost 25%

3. An additional drag on the 529 plan is that when the student spends money from the 529 plan to pay for college,the aid eligibility for the next year decreases by 25% of the amount spent this year.

That 25% tax rate doesn't make me happy at all. Why are the 4th year 529 holdings taxed at 25%?



Can you explain #3 a little more. What do you mean "aid eligibility... decrease by 25% of the rate spent this year"? Do you mean that if the student spends $1000 this year, next year's financial aid eligibility (from sources other than the 529) will be reduced by $250?



I started an Ohio 529 plan for my daughter a couple months ago. Initially I seriously considered going with a tax-managed mutual fund instead of the 529 plan, but decided to go 529 due to the $2k/year tax deduction. Maybe I made the wrong choice? [Note: my daughter - if she goes to college - won't be going for another 18 years or so. ]



Ryan

 

[daveshoe]

Let's say you have 40 grand in a 529. As a parental asset,it reduces college aid by 5. 65% The second year 30 grand is ''taxed'' at 5. 65% the third year 20 grand is ''taxed'' at 5. 65% The 4th year the last 10 grand has been ''taxed'' four times at 5. 65% for a total of over 22%. Once the funding is awarded from the 529,the ten grand she draws out this year will reduce the amount of eligible aid next year by 2500. 00--adding insult to injury.

I wish that all this stuff was one size fits all,but all I can really say is that the lower your earned income is,the better for financial aid. Look on ''how stuff works --529 plans '' for this 529 plan explanation. Most people are better off putting the maximum in their 401K at work,and then putting the maximum in a Roth. If you have a mortgage that is paid down or paid off by college,it is an ''invisible'' asset that does not reduce your college aid, and if you use your house for a HEL to pay for college,the interest is tax deductible. 529 plans work best for those individuals who would not qualify for any financial aid because of their income.

Wittenberg University and Ohio university both have aid estimators that will help you see how much parental income affects what college will cost. You can find them under admissions/financial aid. Good luck

 

[rbattelle]

And who knows what kind of screwed up the financial aid system will be 18 years from now!

Ryan