Financial and Asset Management: Will it Help or Hurt YOUR College-Bound Child?

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Parents of college-bound high school students are often a little bit baffled or frustrated when they think about managing the expenses for their child’s future academic endeavors… and we understand that the subject can be a challenging one no matter how early one starts to deal with the process. And, of course, the stress related to college prep only increases exponentially if the college funding situation is ignored, which is why we are always such proponents of starting the process early!

One of the pitfalls that is faced by many parents actually acts as something of a double-edged sword – and that pitfall is financial and asset management – specifically with regard to college funding and preparation!

On the one hand, there are many parents who have an income that is stretched by the financial realities of modern living, leaving little left over for savings or investments. These families often tend to think that they really do not need any sort of financial management, and since they do not have a huge amount of assets, there is no need for that sort of input, either. (Hint: they are wrong.)

On the other hand, a number of families are on the other side of the spectrum, those with a more significant income and/or net worth. These parents often think that because they already have someone managing their money (if they do), then there is really no need for some sort of special expertise when it comes to their family’s college financial preparation. (Hint: these folks are wrong, too.)

The simple – and perhaps somewhat surprising – truth is that financial and asset management is a vital part of the college preparation strategy, and that holds true no matter how much or how little a family earns. For this month’s newsletter, we are dedicating a few pages to help you understand why this is the case.

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Increasing Costs Make Management Essential

It comes as no surprise to most people that the costs of college tuition in the United States seem to be climbing higher and higher each and every year. In fact, the estimated costs for in-state tuition for 2014-2015 were nearly $20,000 per year. If your child wants to go out-of-state, but attend a public school, the costs are often even higher and can be estimated at nearly $30,000 per year.

Private school tuition, of course, is often (but NOT always, as we have discussed in previous newsletters) even higher than that. Remember that private schools may offer scholarships or other forms of financial aid that can help to bring down the cost of tuition – sometimes even lower than at an in-state school – but those offerings cannot usually be guaranteed for all four years of college attendance.

With these costs continually soaring and no guarantees for scholarships and assistance, it’s more important than ever to plan properly and in a way that will benefit both you and your child. In fact, because assets and accounts are assessed differently, it is important to know how this will affect your child’s eligibility on either the College Scholarship Service Profile (also known as CSS) or the Free Application for Federal Student Aid (the infamous FAFSA). Both of these forms, as well as a number of institutional forms from the schools themselves, will be an integral part of the process of applying to college.

The (Sometimes Confusing) Scope Of Financial Preparation

There are things that can be done beforehand that will help your child. First, you will want to discover which colleges use which types of financial aid forms and other financial formulas. Most public schools use the financial aid forms while most private colleges will request further information into the family’s fiscal assets. Please note that this is NOT a hard and fast rule, however!

There are some state schools that have decided to utilize the CSS Profile, for whatever reason. This means that if your child wants to consider attending one (or more) of the state schools, you absolutely must make sure to find out whether the school (or schools) require this additional financial information. There is no room for assumptions in the preparation of financial aid documents!

Each college may interpret the family situation differently, so it is a good idea to look at the different colleges that your child is interested in and determine precisely how these institutions assess family finances. For example, retirement accounts including Individual Retirement Accounts, Simplified Employee Pension plans, and other forms of pensions are not included in the EFC (Estimated Family Contribution) formula. That is great news, of course… but funds in checking accounts, stocks, bonds, 529 accounts and prepaid plans are included as EFC. So, with that in mind, it would be wise to determine where you want to place assets so it is the most beneficial to your child when applying to college.

It should also be noted that assets in your child’s name will be assessed at almost FOUR TIMES the rate of assets in a parent’s name, so simply changing the name on the account to a parent may greatly lower the assessment of EFC for a family. Generous relatives can certainly give money to an aspiring college student, if you are fortunate enough to have such family members, but these gifts should be managed appropriately so as to minimize the “hit” to the EFC, and increase the available aid to the college student later.

Note also that 529 plan contributions are also technically regarded as parental assets. These plans are assessed at the aforementioned lower rate which will make eligibility for more financial aid a greater likelihood for your child. For more details on how to manage these details, or any unique circumstances related to your child or your family situation, please feel free to give us a call. We can help!

Planning Purchases Wisely

If you have set up a custodial account for your child and there is a large purchase that your family needs to make, it may be a good idea to spend the money from that account during high school instead of letting it be factored into the EFC later. For example, if your child needs a car while still in high school, it might be worth it to allow him or her to purchase that car with the funds from the custodial account.

Now, it is naturally very important for people not to go overboard and spend more than is reasonable. However, if the purchasing is done wisely, your child could then be eligible for more aid later on when the college years begin, and he or she would also have the automobile available for the college years. Most important part of the planning how the colleges are going to look at these assets. There are multiple options that need to weighed as you look at the upcoming college bill for your family.

It is also a good idea to time things properly. For example, in many cases it could be advisable to make larger purchase prior to January 1 of your child’s junior year in high school. The reason for this is because you will be required to submit tax returns from your child’s previous year when they are ready to apply to college (senior year).

Students Should Consider Working… But Not Too Much

It can sometimes turn out that the summer job a high school student takes in order to earn money to save for college can actually turn out to be a liability. This is because many (even most) students do not know that their personal income is weighted more heavily than that of their parents. In fact, some college and university financial aid formulas count it as up to 50% towards the estimated family contribution!

We generally recommend that students should try to earn no more than $6,000 during the year, as anything above and beyond this amount could have a detrimental effect on aid eligibility. Remember that working means getting paid, which means paying taxes, which means that the government will know exactly how much a high school students earns throughout the year. It is important to manage this detail appropriately! As with all of these factors what is the best mix for your family.

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