Are you the parent of a high school junior? If so, 2014 is your “base year” for financial aid purposes. What does that mean? It means that your initial financial aid applications—FAFSA and/or CSS PROFILE—will be based on your income and assets for 2014. Now is a good time to make plans or adjustments that will help you in aid calculations.
As I’ve said before, income is a bigger factor than assets in the formulas. In both aid formulas, the three biggest allowances against income are your family size, how many dependents you have in college, and how much you pay in taxes.
At this point, it’s likely that how much you pay in taxes is the area where you can do the most. And paying more federal taxes is better in the formulas than paying less. (The formula counts actual federal taxes paid, but uses a formula for state tax allowances.) Of course, you don’t want to cut off your nose to spite your face: you want to find opportunities to shift your tax burden into this year with a corresponding decrease in taxes in a subsequent year. One way to do that is to contribute to a Roth IRA rather than your 401(k), or if your employer’s 401(k) plan has a Roth option, use it for some or all of your contributions. You’ll pay taxes on that money now, which will reduce your available income in the formulas, but you’ll have tax-free withdrawals in the future.
Self-employed people have a variety of options for managing their income in the base year. I’ll talk about those in a future post.
Many parents who aren’t sure if their children will pursue 4-year degrees think that 529 plans are therefore not for them. If that sounds like you, you may be surprised to learn that funds in 529 plans can be used at a wide range of schools including community colleges, technical, trade and professional schools. Any school that is eligible for federal aid is a school at which 529 plan money can be used. To see a list of eligible schools, click here.
And, of course, you can change a 529 plan’s beneficiary if the original beneficiary doesn’t end up continuing their education at all beyond high school. You might find yourself interested in a new career path or continuing education, too!
Last month, a bill was introduced in Congress that would make some great changes to 529 plans. One of the best is this: it would allow account holders to roll up to $25,000 in leftover 529 plan funds into a Roth IRA with no taxes or penalty. There are some conditions, such as that the account must have been open for 10 years, but overall this could be a great deal for parents unsure of how best to save for both college and retirement– with most of us meeting that definition!
The bill, HR 4333, is co-sponsored by U.S. Reps. Lynn Jenkins, R-Kan., and Ron Kind, D-Wis. It includes various other provisions including allowing more frequent account rebalancing (4 times per year versus the current once) and adding computers to the list of qualified expenses whether or not your school requires one.
Here are more details.
Since it’s college acceptance season, there are a lot of great articles out there about evaluating offers. Apologies for offering less original content here but reinventing the wheel doesn’t help. Here is a great article from the New York Times that will help you be a more informed consumer of your various offers.
If college is in the near but not immediate future and you want to estimate your family’s EFC, you can use the FAFSA4caster here to do so. But if you want a more accurate estimate and you have your tax documents handy, use the actual 2014-2015 FAFSA worksheet to do it. That is available here. Make sure you use the right worksheet:
- Formula A is for dependent students
- Formula B is for independent students without dependents other than a spouse
- Formula C is for independent students with dependents other than a spouse
(Is that alliteration or what?)
Did you get an aid award that’s not what you’re hoping for? Recently the New York Times wrote about appealing financial aid awards. For the article, Ron Lieber sent a questionnaire to aid officers at some of the priciest private schools asking about their appeals process. Occidental College’s completed questionnaire is extremely helpful for understanding how and why a college might grant an appeal, and it’s available here.
Some highlights that are probably relevant to the appeals– or application– process at any school:
- Private colleges using institutional funds have more latitude to make changes than do public schools using federal funds.
- Your appeal should discuss why you can’t afford to send your student to the school, not why your student wants to attend the school. If they’ve already been admitted, the school already likes them.
- Families with the means to do so need to save for college. It’s a big expense and one that you can plan for because you know college is expensive and you know when you will incur the cost. Your current economic hardship is more understandable and sympathetic if you saved before the hardship came about.
Is your senior among the fortunate ones with multiple acceptances? Part of their decision-making process might be a visit to Payscale.com’s College ROI Report, here. One of my favorite features is the ability to calculate ROI by major.
Of course, getting a good-paying job isn’t the only reason to go to college, but any time you look at a high-priced investment (which college is), you should consider what return you’re likely to get.