Best Method for saving for child's education with minimal impact to Financial Aid?

Hi All,
I've been doing some research lately on what the best way to save for my child's education. I've found several alternatives online including 529 and college savings plans. However, my thoughts are these plans will completely eliminate or reduce the chances of my child getting financial aid or subsidized loans.

I've been asking around (colleagues, not experts by any means) and I've gotten varied advice including opening an some sort of insurance account to opening a Roth IRA (I believe my child have to be working to open that). I've even had someone who had told me to put all my money into a large house and pull out equity when my child goes to college. None of these colleagues really had any rationale behind their suggestions.

I'm thinking more around the area of opening a trust for my child. Any ideas from the fatwallet community? I've also posed the question to my accountant, but he is on vacation this month. I will post his suggestions as well if there is interest in this thread.

Dealspecialist

UNDER THE TABLE.

We have cash value life insurance for the kids as this is not calculated as part of your assets on the FAFSA form: FAFSA FORM.

On Page5:
As of today, what is your parents’ total current balance of cash, savings and checking accounts? (Q91)
Investments include real estate (do not include the family home), trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, Coverdell savings accounts, 529 college savings plans, the refund value of 529 prepaid tuition plans, installment and land sale contracts (including mortgages held), commodities, etc. For more information about reporting educational savings plans call 1-800-4-FED-AID. Investment value means the current balance or market value of these investments as of today. Investment debt means only those debts that are related to the investments. • Do not include the value of life insurance, retirement plans (401[k] plans, pension funds, annuities, noneducation IRAs, Keogh plans, etc.) or cash, savings and checking accounts already reported in questions 41 and 91.

Page 7 has student info... with the same guidelines as the parents to not include life insurance values.

We have a VUL, you can use index ULs if you don't want the market risk. The benefit of this is you can dump as much as you want into your account depending on how much coverage you have. You don't have to be worried about govt limitations like on a 529. Your contributions are not tax free (unless you have a business and want to get creative), grows tax deferred and possible to have tax free distributions in the form of a loan from yourself. If you don't use it for education, you can use it for something else or just leave it. We plan on having our kids pay for the policy themselves when they start working. My advisor says remember, life insurance is life insurance... it is not an "investment" in the eyes of the govt... yet.

Talk to your advisor/accountant.
-p

I have found finaid.org to be a good source for financial aid information. For your particular question, this page looks like a good starting point:

http://www.finaid.org/savings/

This is what finaid.org has to say about your trust fund idea:

http://www.finaid.org/savings/trustfunds.phtml

BigTR said: I think that Roth IRA's seem to be the way to go if you can somehow meet the limited window where you could put $5k per year into the thing and not worry about retirement funding. Even assuming a paltry 3% return, you'd have $120k by the time Bobby started college and not a penny goes on the FAFSA.

This would only work for a limited number of people, but it seems to be a viable options.

http://www.finaid.org/savings/accountownership.phtml

Strong logic for maxing out ROTH IRA's first.

1. You can withdraw contributions at any time without any penalty.
2. ROTH balances are not included in assets used to determine EFC.

darkmeridian said: Yeah. Set up a Roth for your kids. Have them do yard work, and pay them $5,000 for their work over the year. Have them file taxes. Etc., etc., and then withdraw the principal.

That's pretty illegal. You'd be in deep tax trouble if caught.

BigTR said: darkmeridian said: Yeah. Set up a Roth for your kids. Have them do yard work, and pay them $5,000 for their work over the year. Have them file taxes. Etc., etc., and then withdraw the principal.

That's pretty illegal. You'd be in deep tax trouble if caught.
darkmeridian did say to have them file taxes. If you pay them for work, and they properly file the taxes, then I don't think it's illegal at all.

It's still not a good idea, however. Either the kid would have to pay 12.4% self-employment tax, or you'd have to pay household employer taxes (which winds up costing the two of you the same amount) and the kid would likely owe income tax too since you can claim him as a dependent. I would expect that the taxes would make the whole deal a losing proposition.

BigTR said: If you have a business, then it is completely viable. Most people don't have a business.
darkmeridian had suggested paying the kid for yard work. Sure, if you can deduct the kid's income as a business expense, the economics come out very differently. It can work out especially nicely if you're a sole proprietor, in which case there are some nice special rules for employment taxes for your kids.

the op could not have opened this topic at a more relevant time.
we just had our first newborn this year and i've been racking my brains to identify a sound strategy for his college education.
i know some friends have suggested a 529, some say they will pay out of their own ROTH IRA's and some have not done anything...

in our case, both the wife and I max out our 401k's and our ROTH IRA's...
not sure what we should do for the kid's education though.....but one thing is certain, not doing anything is not an option.
maybe we can amass enough in our own ROTH to pay his college costs?
in this way, if for whatever reason, he does not go to college, then no harm done, the money is still sitting in our ROTH for our enjoyment?
just thinking out loud....

Don't Series I Bonds still count for FAFSA calculations, though?

Great ideas so far. I've updated the Quick Summary. Any thoughts on contributing to grandma and grandpa's Roth IRA? Will this affect their ability to get Medicare/Medicaid?

Best method? Join the military and transfer your new 'Post-9/11 GI Bill' benefits to your child! ("1 Weekend a Month + 2 Weeks a Year = Free College for Your Kid!")

-Cost of tuition and fees, not to exceed the most expensive in-state undergraduate tuition at a public institution of higher education (paid to school);
-Monthly housing allowance equal to the basic allowance for housing payable to a military E-5 with dependents, in the same zip code as your school (paid to you);
-Yearly books and supplies stipend of up to $1000 per year (paid to you)

Huge upgrade in benefits from the older Montgomery GI Bill, but this is the truly amazing gift from Congress:
"The Post-9/11 GI Bill allows service members (officer or enlisted, active duty or Selected Reserve), on or after August 1, 2009, to transfer unused education benefits to immediate family members (spouse and children). An individual approved to transfer an entitlement to educational assistance under this section may transfer the individual’s entitlement to: - The individual’s spouse, - One or more of the individual’s children, - Any combination of spouse and child."

I've got one of my girls covered thanks to this...now just need to convince the other to go ROTC!!!

I like the Roth IRA concept but this means one can't really take advantage of earnings.
so careful calculation is needed to see that you can actually cover college expenses with contributions alone.

the other disadvantage of Roth is the yearly cap, saving for retirement AND college within the limit might not be feasible.

You can always have the grandparents purchase the i-bonds. My parents have done this for each of the grandchildren. They buy 2 a year per grandchild and upon college graduation they are handed the i-bonds......

We have to fill out the FAFSA this January...ugh!

I did find this on our local news board...My kids get $100 series I savings bonds monthly. Will this hurt their college financial aid package? They have about $10000 each right now in bonds.
Brian Greenberg - Certified College Planning Specialist:If you are eligible for financial aid, having money in your child's name will result in a higher percentage, 35%, being included towards the expected family contribution (EFC). In the parent's name only 5.6% is applied toward the EFC.

BlueEyesAustinTexas said: Home equity doesn't figure into EFC although some private colleges use it. That's another way to store value.
Cash value life insurance is also excluded from EFC.

niicceem said: I like the Roth IRA concept but this means one can't really take advantage of earnings.
so careful calculation is needed to see that you can actually cover college expenses with contributions alone.
The 10% early withdrawal penalty doesn't apply if you're using the money to pay qualified higher education expenses. So, you should be able to pull out the earnings tax free as well.

I assume that you'd have mentioned if you're self-employed. If you were, you could open a Solo Roth 401(k) and stick huge quantities of money into it, then later roll it over to a Roth IRA.

craftsmd said: fishbane said: Some states offer state tax incentives to contributions to a 529 plan. There is no such benefit to I-Bonds. Also most 529 plans allow you to name yourself as beneficiary or even to change beneficiaries at a later date. If you want to avoid having to report a 529 account on the FAFSA have a grandparent open the account with the grandchild as beneficiary.

Good point...gift the $10K annual limit per spouse to grandparents...have them save the money in their name in whatever method desired (mutual funds/529/bonds/etc).

(Note: Gotta trust your parents not to go on a H&B binge!!! )

Gift quota raised to $13000/person in 2009. Also if something should happen to both grandparents, gifting would make sense only if grandparents' assets are below the estate tax exemption.

Does FAFSA do look-back on parental asset transfer?

The opportunity cost of conscription (pew pew pew!) is higher than the cost of education, for me at least.

craftsmd said: Best method? Join the military and transfer your new 'Post-9/11 GI Bill' benefits to your child! ("1 Weekend a Month + 2 Weeks a Year = Free College for Your Kid!")

-Cost of tuition and fees, not to exceed the most expensive in-state undergraduate tuition at a public institution of higher education (paid to school);
-Monthly housing allowance equal to the basic allowance for housing payable to a military E-5 with dependents, in the same zip code as your school (paid to you);
-Yearly books and supplies stipend of up to $1000 per year (paid to you)

Huge upgrade in benefits from the older Montgomery GI Bill, but this is the truly amazing gift from Congress:
"The Post-9/11 GI Bill allows service members (officer or enlisted, active duty or Selected Reserve), on or after August 1, 2009, to transfer unused education benefits to immediate family members (spouse and children). An individual approved to transfer an entitlement to educational assistance under this section may transfer the individual’s entitlement to: - The individual’s spouse, - One or more of the individual’s children, - Any combination of spouse and child."

I've got one of my girls covered thanks to this...now just need to convince the other to go ROTC!!!

niicceem said:
"if a grandparent provides any type of financial support to the student, that support is reportable on the following year’s FAFSA as student income. The financial aid formula counts student income just as it counts student assets (although the assessment percentages and allowances are different). Most financial aid offices interpret the rules as requiring distributions from grandparent-owned 529s to be included as student income, even when the distributions are not reportable for federal income taxes (i.e. they are tax-free)."

Would having the tuition paid by a grandparent count as student income increase an EFC as much as having the assets in the 529 counted as student/parent assets? This depends on how the EFC is calculated, how large the 529 is and how much money is given by the grandparent.

I suppose if the strategy of storing college savings in the grandparents account works well enough in making the student/family look poor, the distributions from the grandparent-owned 529 will be small and the EFC might not increase much...

purin said: We have cash value life insurance for the kids as this is not calculated as part of your assets on the FAFSA form: FAFSA FORM.

On Page5:
As of today, what is your parents’ total current balance of cash, savings and checking accounts? (Q91)
Investments include real estate (do not include the family home), trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, Coverdell savings accounts, 529 college savings plans, the refund value of 529 prepaid tuition plans, installment and land sale contracts (including mortgages held), commodities, etc. For more information about reporting educational savings plans call 1-800-4-FED-AID. Investment value means the current balance or market value of these investments as of today. Investment debt means only those debts that are related to the investments. • Do not include the value of life insurance, retirement plans (401[k] plans, pension funds, annuities, noneducation IRAs, Keogh plans, etc.) or cash, savings and checking accounts already reported in questions 41 and 91.

Page 7 has student info... with the same guidelines as the parents to not include life insurance values.

We have a VUL, you can use index ULs if you don't want the market risk. The benefit of this is you can dump as much as you want into your account depending on how much coverage you have. You don't have to be worried about govt limitations like on a 529. Your contributions are not tax free (unless you have a business and want to get creative), grows tax deferred and possible to have tax free distributions in the form of a loan from yourself. If you don't use it for education, you can use it for something else or just leave it. We plan on having our kids pay for the policy themselves when they start working. My advisor says remember, life insurance is life insurance... it is not an "investment" in the eyes of the govt... yet.

Talk to your advisor/accountant.
-p

Purin, I'm going to ask you some questions because very few people understand VUL. I don't care if you answer these questions here, but you should know the answer before you drop another dime into your policy.

1)What is the Cost of insurance today? What is it in 10 years? 20 years? 30? Do you understand that you will be paying these insurance charges forever unless you drop the policy? If you ultimately drop the policy, all gains will be taxed as income and not capital gains.

2)Do you know the sales charge? This is often 5%. That means 5% is coming off the top before anything gets invested or any insurance is purchased. Yesterday, I saw a policy in which this was 7.5%.

3) What are the M&E charges? This is an extra charge in case the insurance company isn't charging you enough. This may be 1% of the cash surrender value.

4)What other charges are there?

5)Do you understand that taking money out of the policy greatly increases the chance that the policy will lapse?

Already mentioned, but grandparents opening the 529 account for you is the easiest way.