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Can You Manage Your Finances for More College Financial Aid?

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I've been a believer in using 529 plans to save for college for years. Many years ago, I wrote an extensive article on how to choose a 529 plan. My reasons for investing in them were the small state tax savings and bookkeeping.

It wasn't until recently, when reading about Obama’s 529 taxation plan that it hit me that the money comes out the 529 plan without paying taxes on gains. Typically one has to pay long or short-term capital gains. 529 plans offer a way around that, which can save some significant money.

If I were to put $20,000 in a plan for my two kids now, that may appreciate to $80,000 by the time they are ready to go to college in around 15 years. If I didn't have that money in a 529 plan, I might have to pay 15% or 20% long-term capital gains tax on the $60,000 of gains. That's a tax bill of somewhere between $9,000 and $12,000. I'd rather have that cash go to my kids education.

All of this steered me to an interesting article: Save for retirement now, get more college aid later.

I had always known that it's better to save for own retirement than your children's college. They can get loans to fund their education. You can not get loans to fund your retirement (at least not typically).

However, I had never thought about managing my finances in a way to maximize financial aid for college. I was blessed a full-scholarship, so I've never had to navigate the muddy waters of financial aid. This article makes the point that assets in retirement accounts are shielded from financial aid calculations.

Additionally it appears that assets in a company may be shielded from that calculation. However, investment property in our names are likely to not be shielded. I've long thought about putting our real estate investment properties into a corporate structure, but this would be the kick in the pants to get me to act on it. Of course, this assumes that it really is this easy to shield such assets. It's something that I have to look into more.

Obviously income is going to be an important factor. I have to consult our tax advisor, but maybe there is a way, I could invest in growing my business and purposely keep my income low for a short time. It's an idea, not sure how practical it is. Unfortunately, I "only" have 15 years to figure it out.

I suppose my first step would be to look at the financial aid calculations and understand what factors are weighed and how much they are weighed. There appears to be a good Expected Family Contribution (EFC) calculator here.

Anyone else go down this road of research? If so, please share anything you have to add in the comments.

Last updated on February 17, 2015.

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3 Responses to “Can You Manage Your Finances for More College Financial Aid?”

  1. Big-D says:

    I got lucky as heck on this front. My son’s mother and I never married, but I did save for my son’s college per our original custody agreement (one of the 4 things you must agree to for custody is College Costs). When he was little, 529 accounts (or any tax advantaged account) was in the infancy so I went with a traditional UGMA/UTMA account. I put some money in this account and it has grown to a significant sum. My son lived with his mother until he came to live with me at the age of 9. I technically still claim him on my taxes even though he is almost 20 (and split the difference on our tax savings with him, which he loves).

    Now the part where we get lucky. My son’s mother does not make that much money, and when it came to the time to fill out the FAFSA, the questions are based on who is providing his college money. Well I contributed to his college money via the UGMA/UTMA account 17 years ago and am not paying any more. His mother is to provide the other 50% of his college money per our custody arrangement. What this did was effectively take my income out of the equation for the terms of the FAFSA. So when he fills it out, they use his mother’s income (not his as she does not make enough to trigger the $40k minimum for him to have to report his income).

    So what this does is say that his mother, with 4 kids (my son, and 3 with her husband) making under $40k are paying for 50% of his college, and he pays for the other 50%. This works out great from the form perspective as he typically gets tuition paid for by the FAFSA, and all he has to take money out for is Room and Board from his UGMA/UTMA account. That is if he has not saved enough by working part time to pay for room and board.

    Before people say this is cheating the system, etc. I would like to point this out. 1) This was not planned this way, it was always my intent to have my son use his account to pay for college (since he was 2 when I created it from a Christmas bonus from work). 2) I have validated this every year with the school’s financial aid office that this is the proper way to fill out the forms. 3) I have validated this via examples in the instructions every year which talk about how to claim these type of scenarios. 4) It follows the letter of the law … as they care more about where the money comes from than family assets. People make assumptions about what they have to fill in, not reading the instructions and it costs them.

    Needless to say, I am stoked it worked out this way, and no matter how much I make, it does not affect what he gets from the FAFSA.

  2. There’s something to be said for strategy when it comes to financial aid.

    Thanks to the Alaska Permanent Fund dividend, I got a substantial amount in my bank account. Also thanks to my parents getting to save just about every dime I made at my jobs.

    So when I applied to places like Cornell, they wouldn’t offer any financial aid other than work study. Because if, in 18 years, I could save around one year’s expenses, then surely I could afford the other three.

    Also not helping was that my parents made a decent amount. I have no idea how much, but apparently enough for the schools to think I’d be fine.

    I ended up going to a good but much cheaper school. It worked out, but it was frustrating at the time.

    So if you can play the system a little, I say go for it!

  3. CPA says:

    The other nice thing about the 529 is that the child is not the owner of the account. Unlike an UGMA account. So when the minor turns 18 and decides not to go to college they cannot take the money and buy a sport car.


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