Tips on planning for college financial aid

Scholarships, grants, student loans. Learning about the options available to help you pay for your child’s college expenses requires a lot of homework. Here’s one more thing to study: how to coordinate those sources of funds with your overall financial plan.

As you probably know, your income and assets, as well as those of your child, affect eligibility for federal student aid. What may not be so obvious is the role early financial planning can play.

Expected family contribution. For instance, say your tax plan includes shifting assets to your child as part of a family-wide savings strategy. When you intend to apply for federal educational assistance, you’ll also want to consider the way money and property owned by your child affects the amount of aid you may be eligible to receive.

In general, assets owned by your child equate to less potential student aid. That’s because a larger percentage of those assets counts toward the amount of college expenses you’re expected to pay out of pocket, also known as your “expected family contribution.”

Currently 20% of student-owned assets are included in the expected family contribution, versus a maximum of 5.64% of certain assets owned by you and your spouse.

Tip: Depending on the scheduled enrollment date, you may want to use some of your child’s assets for upcoming expenses, such as school supplies or dorm furnishings.

529 college savings plan. What about putting money in a 529 college savings plan? In addition to being a good estate and income tax planning move, 529 savings plans are treated favorably under financial aid rules, too.

For one thing, the value of the 529 account is considered an asset of the parent in financial aid calculations. That’s true whether you own the account or your dependent child does.

For another, qualified distributions from 529 plans you own are not counted as income on the federal aid application.

Income management. Managing your income is another tax planning move that requires consideration of student aid rules. An example: Deciding to recognize capital gains to take advantage of lower rates can add to your “available income” and reduce potential financial assistance.

Increasing your tax-exempt interest can have the same result, as can hiring your child in your family business. Up to 50% of your child’s income (after certain adjustments) may be counted in the financial aid calculation.

Maximizing contributions to your qualified retirement plans also affects the financial aid formula. The balance in your 401(k) or similar account is not included as part of the assets you have available for paying your child’s college costs.

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