Readers continue to write in with queries about the best way to pay for college. We asked experts to help us answer readers' questions on college savings and tax-advantaged "529" accounts.
Q: How can I maximize college aid for my child? What are the best strategies for where to put our family's money so that we can get as much financial aid as possible?
A: Financial aid can be a game with high stakes, especially if aid is the difference between a college education and a lack of one, or between a heavy load of student loans and none.
If you're anticipating making changes to your family income before you apply for aid, you'll have to do that before Jan. 1 of the student's sophomore year in high school. For changes to your family's assets, those can occur as late as the filing date for Fafsa (the Free Application for Federal Student Aid), as long as you can document the change, say, with a bank-website printout.
"It is important to note that the answers to questions about income and taxes are based on the prior-prior year's federal income-tax return," or 2017 for the 2019-20 Fafsa, "while the answers to asset and demographic questions are as of the date the Fafsa is filed," says Mark Kantrowitz, publisher of the college-finance information site savingforcollege.com.
"Parent assets, including checking and savings accounts, count as less than 6% when determining the family contribution," says James DiUlio, chairman of the College Savings Plans Network, an association of state 529 plans. Schools know that families have expenses other than college, including retirement and the care of elderly parents or other children.
Among the most useful ways to save for college are 529s because the money grows tax-free and can be taken out without taxes or penalties when used for eligible educational expenses.
When a 529 account is owned by a parent, with the student as the beneficiary, the account gets counted at 5.64% of its value. If the student is the owner, money held in the account is counted at 20%; once the student starts withdrawing money, that is counted at up to 50%. An account owned by a grandparent or anyone else doesn't count at all until distributions start flowing to the student to pay for college, and then it is considered untaxed income to the student and counted at 50%.
Before you start moving assets around specifically to increase your financial aid, first go online and use a financial-aid calculator to see how these strategies will affect your aid. It might all be for naught. "If a family has sufficient assets to affect eligibility for need-based financial aid, usually they have sufficient income to wipe out aid eligibility even if they had no assets," Mr. Kantrowitz says.
He cautions specifically against buying life insurance as a way to shelter assets for this purpose, because the contracts are often opaque and difficult to understand, and may come with high fees or charges that end up costing the family more than they would gain in aid.
What's more, "trust funds almost always backfire, so forget about trying to set up a trust fund to shelter the money," Mr. Kantrowitz says.
The only trust funds that don't affect aid eligibility are court-ordered ones (to pay for an accident victim's medical expenses, for instance) or those that are being legally contested at the time of the Fafsa filing, such as a trust set up by a will that is the subject of a court fight.
If you have another child going to college, or your family's living arrangements or financial situation change, you can always call the college's financial-aid office to plead your case for more aid.
"The financial-aid officers at any college are excellent resources for families; just don't waste your conversation time with them recalling what your older child or a relative received four years ago," Mr. DiUlio says.
Quicker ways to pay student loans
Another common problem, he says, is that families often don't look seriously at several colleges, public and private, that may offer choices of grants, loans and work-study. Just because your child declares that she's found her "dream school," don't stop looking for bargains if aid is an issue.
"Don't be the family that takes more time shopping for a lawn mower than choosing a college and the financing that will be a good fit for you," he says.
Rather than go through complicated machinations, it makes more sense just to save for college if you have the means.
"Any dollars in hand are more valuable when compared to having to pay back loans with interest over time," Mr. DiUlio says.
Q: We have a grandparent 529 account for our 20-year-old granddaughter, who has dropped out of college. The financial statements indicate the account needs a custodian until she is age 21. What happens when she reaches 21? Can the account be extended if she decides to resume college? If the account must be terminated, are the remaining funds hers or do they still belong to the grandparents? Would there be a tax on the earnings plus a penalty, and who is responsible for those payments?
A: With this type of account, your granddaughter will gain control at age 21; the money no longer belongs to the grandparents who contributed it, Mr. DiUlio says. She can keep the account open while deciding on future educational plans, or she can withdraw the money as she wishes.
If your granddaughter doesn't use the withdrawals for eligible educational expenses, she will be liable for income taxes on the gains portion of any money withdrawn, as well as a 10% penalty.
Q: My granddaughter, who plans to go to college next year, is living with her aunt. She ran away from home, where her mother was mistreating her, and neither parent is likely to cooperate with filling out financial-aid forms. Whose income will count on the Fafsa? And what can I do with the 529 that I have established for her, since I don't wish to give her parents control of it?
A: In this situation, "she should appeal to the college financial-aid administrator for a dependency override," Mr. Kantrowitz says, submitting copies of documents that prove her circumstances, like letters from social workers, clergy, police, or court orders. Unless she has adopted the girl legally, her aunt isn't considered a parent for Fafsa purposes, but any cash support her aunt is giving her has to be reported on the financial-aid form, Mr. Kantrowitz says.
You don't have to give her parents control of the money in your grandparent-owned 529 account.
"If you don't want to affect her eligibility for need-based financial aid, you could wait until after Jan. 1 of her sophomore year in college to start taking distributions, when it will no longer affect her aid eligibility, assuming she graduates in four years," he says.
Q: My 14-year-old daughters are about to start working part time, and I plan on contributing an amount equal to their total salary to a Roth IRA, up to the maximum allowed, every year going forward. How will this affect their ability to receive financial aid for college?
A: An IRA (or other retirement account) isn't reported as an asset on the Fafsa.
"However, distributions from a Roth IRA, such as a tax-free return of contributions, will count as untaxed income on a subsequent year's Fafsa," Mr. Kantrowitz says. Those distributions will reduce aid eligibility by as much as half of the distribution amount.
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