Just because your child is about to enter college doesn’t mean you’ve run out of time to save money.
It’s a common myth that if your child is about to head to college or is already in college, you’ve reached a point when the only thing left to do is take out a few large loans and get ready to bear the burden of tuition.
According to top college funding planners, that is simply not the case. Parents often don’t realize that with the proper financial planning, they can save significant amounts of money even while their child is still in college. The following are a few basic tips to save money in the late stages of college planning.
Apply for financial aid as early as possible. The standard Free Application for Federal Student Aid (FAFSA) forms are the first and most important to complete. Getting into the mix early increases your chances of being awarded “first come, first served” financial aid packages, and being prompt increases your chances at better awards and loans, reducing the amount of out-of-pocket costs passed on to you.
Make sure you go over the financial aid forms and regulations with a financial professional. Anyone who has tried to navigate through the forms or the pages of rules and guidelines can tell you it’s more than a little complicated. Having someone help you through the process doesn’t just ease the burden financially; it also takes away a lot of stress and anxiety.
Your FAFSA forms typically take a few weeks to process, which is another reason to plan ahead. Once your financial need is determined, schools you’ve applied to will offer a financial aid package. The package can include various ways to pay for college, including loans, grants and any scholarships they have awarded your child.
A little research can go a long way in saving you money for college. If your child is considering multiple schools, determine which schools give out more aid and scholarship money. Make sure your child applies to at least two schools where he or she is in the top 25 percent of the applicants. This can be found by doing some basic research on the grade point averages of previous freshman classes.
Relying too heavily on high school counselors when filling out financial aid forms is a common mistake. Counselors may be responsible for helping hundreds of students and often cannot provide the personal attention each individual student needs. That’s why a trusted college planner is best.
Gifting and Shifting
Shifting or gifting assets to your child makes gains from selling those assets taxable at the child’s lower tax rate rather than the parents’ rate. In 2006, Congress changed the age at which a child moves from the parents’ to his own tax rate from 14 to 18. Starting in 2008, the kiddie tax was expanded to include dependents under age 19 and dependent full-time students under age 24. Children who provide more than half of their own support are not affected by the kiddie tax. The kiddie tax applies only to investment income, not earned income, so teens with jobs pay income tax at their rate, not their parents’.
The change put the future of accounts established under Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) in question. Under these acts, individuals can place assets in accounts for the benefit of a child but retain control of the assets as the trustee until the child reached the age of majority, usually 18. The tax benefit of moving assets to a child’s name may now be reduced, as income invested in these accounts over the kiddie tax threshold will be taxed at the parents’ rate anyway. The first $1,050 of unearned income a child or college student earns will be offset by the $1,050 standard deduction (assuming the child has no earned income), and the next $1,050 of such unearned income will be taxed at the child’s tax rate. All of the child’s unearned income in excess of $2,100 is taxed at the parent’s tax rate.
Thanks to the American Taxpayer Relief Act of 2013, parents in the 10 percent or 15 percent tax bracket will pay 0 percent for capital gains, but parents in higher brackets may still want to consider transferring appreciating assets. College students usually fall in a lower tax bracket than their parents, so transferring and selling assets after their child turns 18 will most likely mean less capital gains tax than if the parents had sold those assets themselves.
Children who file their taxes independently are in a lower income tax bracket, which can work to your advantage. The money you save in taxes adds up quickly and can be used as one more way to pay for college.
If you own a small business or rental property, you can use that property to your advantage by employing your child. Your child will learn the value and responsibility of work and receive a wage. As a small business, you can offer a specialized Employer Education Assistance program, which allows you to give up to $5,250 a year tax-free to employees who are attending college.
No matter what stage in life you’re at, it’s never too late to save for college. With some simple strategy and some help from your financial advisor, you can find ways to reduce college costs and increase the ways to pay for it.