WV Executive

For most parents, planning for their children to attend college is the most troublesome of all their financial concerns. Studies have shown that the importance to parents of finding funds for college typically outweighs other investment concerns, including their own retirement.

In an effort to demystify the subject somewhat, below are some of the more interesting things you need to know about college funding. Having at least a nodding acquaintanceship with them can help you get started.

To get started, one should be aware that there are two broad categories under which college may be made more affordable: Financial aid and tax savings. Federal and state governments provide most of the money for financial aid. Colleges implement most of this through their financial aid offices. They routinely arrange for loans, jobs and grants to help students manage the costs. Tax savings is governed by the Internal Revenue Code which contains tax incentives for saving for and paying for a college education. As with most tax issues, there is a lot of fine print involved.

Crafting the best strategy varies in each situation and a review of all of the possibilities is well beyond the scope of this article. So, we will consider the topic generally and provide a few suggestions and strategies to give you an idea of what is possible.

Looking at financial aid first, it is important to recognize that the better the case is made for limited means in the official financial aid application forms, the better the assistance that should be forthcoming. Examining legal and logical ways of re-arranging assets to lower what collegiate financial aid professionals know as the “Expected Family Contribution,” (EFC) can be a valuable exercise.

Decisions regarding financial aid are made after the family of the student involved bares its financial soul. Data is gathered on a standardized form called the Free Application for Federal Student Aid, or FAFSA. Additionally, some schools have supplemental forms they use to compliment the data gathering of the FAFSA. FAFSA and any supplements, when completed, provide information that is then subjected to the scrutiny and formulas of financial aid officers. At the end of the analysis of FAFSA the EFC is determined.

For example after working through the forms, a family’s EFC is determined to be $20,000 for the upcoming school year. If the child decides to attend a school with total costs of $18,000, no needs-based aid will be considered. On the other hand, if the cost of the selected school is $30,000, then $10,000 in financial aid eligibility would result. As a rule of thumb, the more expensive the school, the better the chance of aid, especially if a family has two or more children attending college simultaneously.

It's Good Form

Failing to fill out financial aid forms is a big mistake frequently made by affluent families who presume they are not qualified for financial aid. It is true that a family that has an adjusted gross income of $125,000 or more annually has little chance of traditional financial aid unless more than one child is in college at the same time. However, in recent years many of the pricey private and semi-private colleges that may appeal to the more affluent have made financial assistance available regardless of need. These non-needs-based tuition reduction plans go by such euphemisms as “Merit Aid” and “Tuition Grants.” However, many colleges that have this aid available will not offer it to students who haven’t applied for financial aid in the first place. So the rule here is: take a deep breath and complete the forms.

West Virginia Aid

Unlike most states, West Virginia now has its own state-sponsored Merit Aid program called the Promise Scholarship. These scholarships will pay the tuition and mandatory fees for the qualifying student at any of the state sponsored colleges and universities for up to eight semesters. Additionally, Promise will pay an amount that is equivalent to in-state tuition ($3,160 in 2004-2005) to any of the state’s private higher education facilities for the same period. In all there are 33 West Virginia institutions from which the student may choose.

West Virginia also has a financial aid program for college hopefuls who are in need of financial aid, but do not have as lofty an academic record. That program is called the West Virginia Higher Education Grant. In the 2004-2005 school year, the maximum grants were $2,756 from this program. Families with a low EFC are considered for this aid.

Lowering the EFC

Reducing the EFC in permissible ways is hard to do in some cases and easy in others. Below are some ways one might consider to drop the EFC. Take assets out of a child’s name, move assets to other categories, transfer a Section 529 account to a non-parent, hold down your adjusted gross income, or maximize your retirement contributions. The list is in no way inclusive, but rather it is suggestive of creative methods one might utilize.

Consult with your personal financial planner and tax advisor before proceeding with these or other ideas

In saving for college, there are several Federal programs available. The best known of these is the Qualified Tuition Program (529s). States were authorized to establish these in 1996 and every state now has one. Once funds are deposited in these plans they grow tax deferred. When distributed to pay for various education expenses for their beneficiary, they will not be taxed at all. One caveat: That tax treatment expires in 2010 unless Congress renews the provision.

An investment of up to $55,000 ($110,000 by a couple) to a 529 program in one year may be made without incurring a gift tax consequence. There is an estate planning advantage here, too, in that funds that go into a 529 are removed from the estate, even though they could be reclaimed. The maximum one can contribute to a West Virginia sponsored plan is a lofty $265,620.

While 529 contributions are not tax deductible at the federal level, they are deductible up to the maximum contribution allowed on a West Virginia tax return. Be careful here because this is true only if you use West Virginia’s 529.

A less appealing program is called the Coverdell Education Savings Account. As with 529s, there is no deduction available at the federal or state level with Coverdell and the annual contribution is capped at $2,000 per beneficiary to a maximum of $36,000. Coverdell distributions receive the same treatment as 529s, but unlike 529s there is a phase out for these programs at certain income levels.

Prepaid tuition plans are available from most states as well as many colleges. They can offer an inflation hedge because participating in them usually puts a lock on the tuition involved at current cost, adjusted for new contributions annually. The risk with many of these plans is that they are not guaranteed and are dependent on the performance of the underlying investments for their eventual outcome. They are frequently less flexible in the latitude of schools that are involved, too. Look carefully at the fine print if you consider using one of these plans. West Virginia closed its plan to new enrollments in March 2003 and set up a system to guarantee its solvency for those already participating.

The independent colleges now have their own pre-payment plan in which about 200 institutions are participating. The money deposited in this program locks in the tuition in the year of the deposit and it can be used at any of the participating schools.

Give Them Credit

The Federal Tax Code offers credits against the tax bill for those who are paying for college for themselves or for their dependents. There are two types of credits: the Hope Credit (HC) and the Lifetime Learning Credit (LC). These can only be applied to tuition and fees, not other routine college expenses. HC can be used only during the first two years of college and is a credit of up to $1,500. The higher the tuition, the more value the LC offers because it is calculated at the rate of 20 percent of the tuition and fees and tops out at $2,000. The use of these credits is phased out at higher incomes.

Since one has to be a taxpayer for these to help out, a strategy utilized by the affluent who cannot qualify for need-based financial aid, but are sending their children to expensive institutions, is to move assets and income over to the child. That way the child can pay for more than 50 percent of his upkeep for a tax year. Such students then cease being dependents in their parents’ returns (they lose an exemption) and become taxpayers themselves, thus receiving the standard deduction and picking back up the exemption. Currently, if the maximum education incentive tax credits are layered on, more than $35,000 can be received in untaxed income by a student.

The use of these methods and systems, as well as many more beyond the scope of this discussion, should be carried out with the help of a qualified advisor and tax professional. West Virginians who arrange for their children’s college educations within the context of the full range of planning opportunities available will be the better off for having done so.

For more information on this subject, read the expanded story on the Web at www.WVExecutive.com.