Saving for College Without Hurting Aid Chances
Our family has a generational tradition of helping out the next generation with college expenses. My Mom was the first to attend college. She attended a city college and was helped out by her parents. She and Dad saved to send my brother and I to state university for 4 years and my spouse and I sent our two sons to public universities for 4 years. Now one of our sons is faced with trying to continue the tradition, even while needing to put a wife through college, dealing with the results of the Great Recession and trying to save for retirement.
College is expensive, no doubt about it. Our son recently calculated that he would need to save $350,000 to send his two children through 4 years of college when the time comes. To put that in perspective, we needed $80,000 to pay the way for our sons and my parents paid out $8000 for my brother and I. He and our daughter-in-law are concerned about their ability to be able to continue our family tradition. They are rightly focused first on supplying their own retirement and educational needs.
Although they have started a 529 account, they continue to look for better investment vehicles for their college savings.
My husband and I have been gifting the kids each year to remove assets from our estate tax free as well as to assist them. So far, we haven’t been contributing specifically for college. To be honest, I’ve been a bit confused about the best way to help and even our son is unsure of the best way to save for college.
It is likely that help will be needed. If so, I want to set up funding in a way that minimally impacts my grandchildren’s chances to receive aid, since we may not be able to provide ALL of the funding needed. Unfortunately, according to Better Investing scholarships and grants that don’t have to be repaid are getting scarce and most financial aid packages are made up of loans combined with work-study programs.
One of the goals of our generational educational initiative is to get the kids educated without drowning them in debt! However, with a college education being so very expensive, that may not be possible for this up and coming generation. For many Americans, and I suspect a few of you readers, it wasn’t possible for the just graduated generation, weighing many of you down with tens or hundreds of thousands of dollars of college debt.
To start the brain juices flowing, let’s first think through the different ways to pay for college.
Ways to meet college expenses.
Family pays for the full ride.
In this option, no loans are needed, no grants or scholarships required and little if any labor from the student has to be supplied.
However, unless the family is very well off or has saved for generations, this option is not typically possible anymore.
If grandparents can and want to help out, one way to do so is to pay the fees for tuition directly to the college. Doing so eliminates the possibility of that money being considered a ‘gift’ by the tax man. The grandparents could then use their annual gift exclusion amount to provide some of the remaining college costs – such as room and board and books. If Grandparents pay the room and board, it is considered a gift. This of course, assumes that no financial aid is involved as the gift for the room and board and books would be considered income to the child.
Family pays for part of the college expenses and the student works to pay for the rest.
Even with the earned income from the student, many families still cannot afford to foot the college bills – especially with more than one in school at the same time.
There are colleges and universities that do encourage student work to pay for tuition. For example, The College of the Ozarks bills itself as “Hard Work U”. Here it is possible for a student to work to pay for their tuition by working campus jobs. Their mission is to provide a quality, Christian education to those who are found worthy, but need financial help. It is located just south of Branson, MO.
However, the student does have to fill out the Free application for Federal Student Aid (discussed more below). Whatever aid is received from that is used to help pay for the program, but even if it isn’t enough, the college supplies remaining tuition.
“Upon complete participation in the Work Education Program, the College guarantees to meet the entire cost of education for students, allowing them the opportunity to graduate debt-free.”
Even so, the family may get to help with the room and board costs. The college does have a summer program which allows students to work through the summer to pay for the next years boarding costs however.
Student gets a full ride scholarship or grant.
While not frequent anymore, this is still a possibility. One of our nephews, with excellent grades and a long list of grade school and high school accomplishments, actually got a full ride to Washington and Lee University just last year.
Finding these offers can be a real treasure hunt. Our nephew happened across this school and scholarship due to knowing someone who knew someone!
AARP suggested that one way to help your grandchild is to become the family expert on scholarships. Searching for full ride (or any type actually) grants or scholarships can be a full time job – and comes at a time when the student is typically busy trying to graduate from high school and the parents are at full throttle with their careers.
If you grandparent’s aren’t up to the actual search task, perhaps you could help by hiring a ‘scholarship’ coach during your grandchild’s high school years. A coach will help guide the youngster and family into meeting academic, community service, and leadership requirements to get a full ride and assit in the search and application process. Just be sure the coach you hire is competent.
Scholarship.com describes these full ride scholarships, lists several and gives you information on how to find them. One of the ones listed is the Chick Evans scholarship which paid my spouse’s tuition and room expenses. He worked for his food by serving and cleaning up after meals in a sorority house.
Student gets a financial aid package.
One of the avenues to apply for aid is the Free application for Federal Student Aid. This is a part of the US Department of Education. They claim to be the largest provider of student aid in the country. To receive any aid of any kind (and there are several types listed), you have to fill out the application. The information you supply is used to generate a potential aid amount – based on need.
The calculation accounts for parental assets, assets owned by the student, yearly income and more. There is an expected family contribution amount based on the data on the application. So, if the parents make a lot of money or have a lot of non-retirement assets (retirement accounts don’t count in the formula), or if the student has assets in their own name, the formula thinks the need is less and the expected family contribution (EFC) amount should be more.
The College Money Man puts it this way:
“Every dollar in assets, including cash, bonds, marketable securities, trust funds, and any business interests can have a huge impact on the final EFC number! Many employing EFC strategies empty their bank accounts the day of filing the FAFSA to keep cash levels low. But here is the problem; parents have their available assets included in the EFC at a maximum rate of 5.64% of their real value. Students who are dependents however are hit at a 20% rate! In short, students who have savings bonds or trust funds from grandma are penalized at a rate nearly 300% higher than their parents!”
Student takes out a loan.
This is the avenue many students end up taking, causing them to start adult life with a negative net worth! Student loan debts are there for life until forgiven or paid off. Bankruptcy will not discharge them.
Certain types of student loans can be forgiven under certain circumstances. Our other daughter in law went back to college to get a BA in nursing and is working as a registered nurse and a teaching nurse in a state hospital. As long as she is working there, her loans are being forgiven. Read more about the conditions of this forgiveness here.
My blogging buddy, Michael Lux – a lawyer who “owes a good sized fortune in student loans” has put together a nice resource on all things student loans on his site The Student Loan Sherpa. Check out the guide if you are just getting started thinking about loans.
Student starts a career at a company which will assist with college expenses.
Many large and mid-sized employers offer perks in the form of educational assistance. One strategy that could be used is for the high school student to pursue work experience or certification in an area that allows he or she to obtain a full time job in that field, and then work with the Human Resources department to obtain college educational assistance – for tuition and sometimes even the books.
Student provides service to other organizations or the country to receive college funding.
AmeriCorps provides an amount equal to the current year’s PELL award after serving one or more terms in the AmeriCorps. In 2013 this is just $5645 so this wouldn’t be a full ride. AmeriCorps is part of a US Federal agency called The Corporation for National and Community Service. Other corps included in this agency include the Senior Corp, and a FEMA Corps.
Likewise, if you serve in the Peace Corps, you may be eligible for loan cancellation (Perkins loans) or deferment of payment. Additionally, there are benefits available after your service:
“The Paul D. Coverdell Fellows Program (formerly known as Fellows/USA) offers returned Volunteers financial aid, such as scholarships and stipends, and professional internships at more than 70 partner schools.”
If you are willing to defend the country, there are various programs available to ROTC, active duty and veterans for tuition and other college expenses. Some pay a certain stipend, others pay for it all (or most of it). Military.com has an article with resources for you to explore the various options.
So, if you are a future student or the parent or grandparent of a future student, what are some of the options for helping out with college expenses?
How to fund college without hurting chances fro financial aid.
First, here are some things NOT to do.
Don’t put savings bonds in a kids name.
Although some US savings bonds are tax deferred and the tax is forgiven if the money is used for educational expenses, having the bonds in the students name will count against them in that Free application for Federal Student Aid. If well meaning relatives or good friends want to give a bond, have them keep it in their own name, perhaps with a pay on death clause to the future student. Then when it comes time for the college bill to be paid, the relative or friend can use it to pay part of the Expected Family Contribution amount.
Don’t give gobs of money to the kid.
Don’t gift the student while they are attending college or in the last years of high school.
The gift will be counted as income to the child in the aid application. Give the money to the parents instead and let them use it to pay expenses.
Don’t set up a college trust fund with the kid as beneficiary.
Certain types of trust funds – where the kid is the beneficiary and has access to the money (or at least doesn’t have to wait for you to die to get it), can be counted as assets in the aid application. Instead, use the parent’s 529 account to hold the funds, or wait to pay the tuition directly to the school while the child is enrolled
Don’t let Grandma open up a 529 savings plan for the kid.
Although the money in the plan won’t be counted as assets in the Financial Aid Application, the distributions will be counted as income – according to Fidelty article: ABCs of 529 College Savings:
“…while these 529 savings are not reported as a student asset on the Free Application for Federal Student Aid (FAFSA), any distribution from this 529 plan is reported as income to the beneficiary, potentially resulting in a significant reduction in eligibility for need-based aid the following year. “
Instead, have everyone give the money to Mom and Dad to put into the 529 plan they open for the future student. That way, both the asset and the distribution are excluded from the application (at least as of 2013). Mom and Dad need to make sure that third parties CAN contribute, some states may disallow this.
If you already did that, here are a couple of work arounds suggested by FinAid.org in Tips for Grandparents on Helping Grandchildren Pay for College:
“There are two main approaches to fixing the financial aid treatment of a 529 college savings plan owned by the grandparents. One is to change the account owner to the student or to the student’s parents. The other is to delay taking a distribution until the student’s senior year in college, when affecting next year’s financial aid eligibility is no longer a concern. (Technically one can take the distribution any time after January 1 of the junior year in college.)”
Consider these methods when funding for college.
Have a family discussion.
Grandparents and other helpful relatives need to discuss the college funding plans of the parents.
If your son or daughter has made specific plans to help get your grandchild educated, you don’t want to inadvertently impair or ruin those plans. Be sure and have a family discussion when new grandkids arrive, as to the parents desires and funding plans for secondary education.
For instance, if the parents want to use a 529 savings fund, grandparents may want to just put their gift money into that. On the flip side, maybe the parents think it is inappropriate to fund college expenses – they think the student is more committed when paying for it themselves. In that situation, perhaps the grandparent should consider waiting and then helping their grandchild set up a business or get a first house. Some parents also worry that their child will end up not going to college and the money would then be subject to penalties and fees to draw it out.
Be careful when gifting directly to the child.
Setting up assets in the future student’s name directly can adversely affect their chances for need based grants, scholarships and loans.
Be careful when bequeathing money directly to the child.
If your estate plan leaves money to a child or grandchild as a beneficiary, and you die and the money gets distributed while the child is in college, the assets he or she inherited will be counted against them in need based aid applications.
Volunteerism may be preferential to paid summer jobs.
According to the College Money Man, money earned in high school by the kid counts against them on the aid application even if it is spent and not available for school. The idea is to have the kid find a volunteer opportunity that will give them the experiences needed for the life for which they seem headed, and get gifts of money from parents and grandparents in lieu of a wage.
Have the child open a Roth IRA account.
If you are like me, though, you would rather your child or grandchild get some work experience under their belt while they are still at home. If your child does have earned income, have them open a Roth IRA account with their net earnings. If they aren’t willing to put it there, consider offering to do a dollar for dollar match if they do put their earnings in an IRA account. According to Better Investing most colleges don’t include retirement accounts in aid calculations. They can withdraw the money tax free to pay part of their college expenses.
Heap on the gifts during the student’s last year.
When the student has qualified for whatever aid they are going to get in their senior year, the aid application calculations are no longer a consideration. You can go ahead and give all you want to your grandchild at that point.
Pay off student loans for your student.
Another strategy is to let the student seek whatever aid they can find, and then, if they end up with loans, use any monies you had set aside for college to help them pay off the student loans.
Give your future student non-financial assistance.
Help them find scholarships. Some colleges give grants to students with parents or grandparents who have certain affiliations. Hand over a list of your employers, military service, organizational memberships, hobbies, activities and accomplishments and help them use it to search for college money. According to FinAid.org there are legacy scholarships (grandpa attended this school so granddaughter gets money); military scholarships (mainly for direct dependents of the service person) and ethnic or geographic scholarships. This can be done in addition to the grandparent (or parent) actually leading a search for money or hiring help to do so.
Wow, you made it to the end of this large post! I spent quite a bit of time researching this topic. I hope you can use some of the resources and ideas I presented. If so, please consider sharing this with a college bound family! As always, take your own situation into account – you are the best judge of what is right for you in your situation!