Financial aid for college: Does getting a job help or hurt your student’s eligibility?

August 19, 2013

Remember the good ole days? Back when you could have a summer job working as a camp counselor, a babysitter or a lifeguard, and help fund a significant portion of your college expenses?

While these were – and still are – noble endeavors that can teach young adults valuable lessons about social and financial responsibility, when it comes to paying for college these days, they’re simply not that useful anymore.

In fact, depending on how much one makes, it may actually be doing some harm.

Why? Because the federal financial aid formula factors in a student’s income. In fact, a student’s income and assets are the biggest piece of the financial eligibility formula. Any income over a base protection amount ($6,130 earned in 2012 for the 2013-14 school year) is heavily assessed, and all assets held in the student’s name are assessed at a maximum of 20%. Student assets can include things like their own bank accounts, trust accounts, UGMA/UTMA custodial accounts and education trusts. Retirement assets like Roth IRAs are not included.

For example, if Junior has $10,000 in a Roth IRA, it won’t impact his financial aid eligibility one iota. If he has $10,000 in his bank account, though, his eligibility may drop by $2,000.

This isn’t to say that Junior shouldn’t take that amazing (paid!) internship at a local law firm, but from a college planning perspective, it may be in both his and your best interest to take the income he receives from that job and place it in an account in your name, since parental assets are assessed at a much lower rate than a student’s (approximately 5% versus 20%).

Junior can also avoid taking a major financial aid hit by getting a work-study position on campus, which doesn’t factor into financial aid considerations. He’ll still get the benefits of a regular job – income and discipline – without the financial aid penalty. Moreover, since most work-study positions are on campus, he likely won’t have to take a portion of his income to pay for transportation to and from his job.

Planning for college funding is complicated – and we’re here to help. If you feel overwhelmed by the number of options available to you, consider attending our upcoming webinar, “Education Planning and Funding: 4 Steps to Help Ensure Your Plan Makes the Grade,” on August 21, 2013.


529 plans – A tax-efficient way to pay for college

May 29, 2013

Piggy bank with grad capIt’s the week of 5/29 – what better day to discuss the ways you and your family can benefit from a 529 plan?

If you’re a parent or a grandparent, you’ve probably worried about how you’ll help pay for your children’s college education. With the price of tuition outpacing the general inflation rate, planning for college has become a more critical component of financial planning than ever before. A 529 plan can be an immense help when it comes to paying some of these expenses, but it can depend on the plan you choose and how early you begin investing in it.

529s can help you save

In a nutshell, a 529 plan allows you to accumulate funds to help pay for a designated beneficiary’s qualified higher education expenses at an eligible educational institution. The plan gets its name from the section of the Internal Revenue Code (Section 529) that outlines its provisions. They are generally available to anyone, regardless of a family’s income level, and they’re tax-advantaged to boot, meaning that investment earnings from the plan are allowed to grow federal income tax-free, and withdrawals used to pay for qualified education expenses are also tax-free.

There are two types of 529 plans: prepaid tuition plans and college savings plans. Both are generally sponsored by state governments and administered by one or more investment companies.

Prepaid tuition plan

  • Contributions are made to a qualified trust
  • Lets you lock in tomorrow’s tuition at today’s rates
  • Allows you to purchase a number a course units/academic periods that are redeemed when a beneficiary becomes old enough to attend college

College savings plan

  • Lets you choose from a menu of investments typically managed by mutual fund companies
  • Amount available to help pay higher education expenses depends on growth in account
  • Offers more return potential, as well as risk

Eligibility and withdrawal rules

Generally speaking, everyone is eligible to contribute to a 529 plan – it’s not limited by age or income. Depending on the program, you could contribute upwards of $200,000 on behalf of a beneficiary. It’s a good idea to check with your program sponsor for details on how various factors such as age, current education costs and projected inflation rates could influence your maximum contribution limits.

As previously mentioned, tax-free withdrawals from the account may used to pay for qualified education expenses such as tuition, fees, books and supplies, among many other options. And it’s not just for undergraduate education – they may be used for graduate school expenses, as well! Withdrawals that are not used for higher education expenses are subject to ordinary income taxes – either at the owner’s rate or the beneficiary’s rate – and an additional 10% penalty tax.

Is a 529 your best option for saving for college?

Not always. A 529 plan can be a great tool, but it’s best for those who are relatively certain the beneficiary will eventually attend college. If the original beneficiary of the account opts not to pursue higher education, the account owner may change the beneficiary, but only if the new beneficiary is a member of the same family. Currently, there’s no federal income tax to transfer the account, but this could change.

To read more about what to consider when saving for college, including the 4 reasons why it’s worth the effort to save and invest specifically for your children’s college education, check out Bruce Helmer’s book: Real Wealth: How to make Smart Money Choices for what matters most to YOU.

Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investment in such state’s qualified tuition program.  Withdrawals used for qualified expenses are federally tax free.  Tax treatment at the state level may vary.  Please consult with your tax advisor before investing.

Saving for College

September 2, 2010

Another school year is around the corner and your children or grandchildren are that much closer to college. If you haven’t already started to save for their college costs, this may be a good time to talk to your advisor about setting up a tax-sheltered college savings plan.
By planning ahead, you can use a 529 college savings plan to give your children a head start on their college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans.
College savings plans are state sponsored investment accounts that allow participants to contribute regularly. A 529 plan account grows tax-deferred and withdrawals from the plan for qualified educational expenses are exempt from federal income tax. There are no income limits.
By investing in a 529 plan outside of the state in which you pay taxes, you may lose tax benefits offered by the state’s plan. Withdrawals used for qualified expenses are federally tax-free. Tax treatments at the the state level may vary.

Vacation Properties and Income – Part 2

September 14, 2009

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).

Vacation Properties and Income – Part 1

September 10, 2009

If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.

Simple Truths

September 8, 2009

As a financial advising firm, one of the simple truths we have learned is that relationships are the single greatest influence on how people use their money and plan for the future. When people talk about their hopes and dreams, they talk about the people they love. Their future, the life they wish to live, is always full of the people most important to them. They don’t talk first about dollars and cents, Dow averages, or bond yields. They talk about a spouse, a parent, a child. When imagining their financial futures, even those without family often focus on others, such as employees, friends, faith communities, and charities.

Keeping Your Emotions in Check…

September 3, 2009

In times like these, with the economy in a tailspin, and the stock market in the tank, investing requires an extra dose of patience, perseverance and perspective.
It takes patience to ride out the bear market, perseverance to continue to invest even through a difficult economy, and perspective to see the long-term picture and realize that recessions and bear markets are just part of the natural economic cycle. Slumping economies and bear markets of the past have always turned around — and there is no reason to believe that this time will be any different.