If you have a child in college, or if you’re getting ready to send one next fall, you’re probably in the midst of divulging all your financial secrets for the Free Application for Federal Student Aid, or FAFSA.
And if you’re not, you should be.
Everyone — yes, even you 1-percenters — should complete a FAFSA every year.
“There is nothing to lose by submitting the FAFSA form aside from an hour or two of time,” says Charles Pawlik, a certified financial planner with Lassus Wherley in New Providence. “Eligibility formulas can vary, and it is certainly possible some form of aid may be available.”
Some schools also require a FAFSA for the student to be eligible for university-based grants. Every little bit of aid will help with the staggering bills. For the current academic year, the average tuition and fees for public in-state colleges is $8,655, while the average tuition and fees at private nonprofit four-year schools is $29,056, according to the College Board.
That doesn’t include room and board.
Whether this September is your college target date or you have little ones, college-specific savings plans can be the way to go.
It’s tax benefits that make 529 plans so attractive.
“The money grows tax-deferred and can be accessed tax-free if used for qualified college expenses,” says Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Fairfield. “Some states allow a tax deduction on money used to fund the 529 plan, though New Jersey does not.”
The 529 plans also provide flexibility by offering a variety of investment options, including age-based plans that automatically adjust the stock and bond investments based on the child’s age. And you can change beneficiaries if the child decides not to attend college.
You also can save in a Uniform Transfers to Minors account, or UTMA. Earnings in these custodial accounts, unlike 529 plans, are taxed: The first $1,000 in earnings is tax-free, the second $1,000 is taxed at the child’s rate and anything above that is taxed at the parents’ rate.
The bigger problem, potentially, is that UTMAs count as a child’s asset, so they can work against you in financial aid formulas because a larger percentage of a child’s assets are expected to be earmarked for college costs, Pawlik says.
Another issue is that UTMA funds, because they belong to the child, can be used by the child for any expense — say, a new car instead of college tuition — when the child is no longer a minor.
If you haven’t saved enough, make sure future savings are in the parents’ names, not the child’s name, because a child’s assets count more heavily in those old financial aid formulas.
“To this end, any child-owned assets that have already been accumulated in accounts such as UTMAs should be spent down for the child’s needs first,” Pawlik says.
Next, use available funds to pay off consumer debt, such as credit card balances. Pawlik says the financial aid formulas ignore debt, but they won’t ignore cash sitting in your accounts.
Then, look at your investments. FAFSA looks at both the income and the assets of parents and of the child, Pawlik says, so consider minimizing capital gains and applying capital losses against your income (up to $3,000), which can help to reduce income and may be helpful for financial aid purposes.
If you have a limited budget, it might make sense for your family to consider less expensive colleges, at least to start.
“I really feel that the additional cost of private school, in most cases, is simply not justified,” Lynch says.
He suggests you buy an education the way you buy a car, and compare the benefits to the costs.
“You have to see if the income that will be generated is worth it,” Lynch says. “I have a client whose daughter went to NYU and wants to work in social services, where maybe you will make $30,000 to $40,000 annually. Not a good use of funds. Spending $60,000 a year so you can have a cool bumper sticker is nuts,” he says.
Lynch says you could also consider the least expensive path: a local community college for two years, then transfer to a state college.
Most importantly, don’t give up and keep saving, Pawlik says.
“Even a few years worth of tax-deferred contributions and earnings can have a meaningful impact on the overall savings level,” he says.
Remember that your student will generally be in school for at least four years, and the five-year plan isn’t uncommon. Continue to save while a child is attending school. Paying for some expenses out of income may allow greater contributions for junior- and senior-year expenses. Another advantage, says Pawlik, is that savings accumulated on behalf of the student after the FAFSA is filed for a particular year won’t be counted against the student’s financial aid eligibility for that year.