Little-Known Secrets of Paying for College: A Planning Primer

By Brock Jolly
The College Funding Coach

For most high school graduates, a college education has become an expectation, rather than an option. For many families, the exorbitant cost of higher education has made paying for this rite of passage more like a PhD in microeconomics.

The good news is that there is a solution.

I see many families with varying degrees of wealth. The majority of these families have their money in two places — their home equity and their qualified retirement plans, including IRAs and 401(k) plans.

When it comes time to pay for college, neither of these two resources is particularly liquid. In many cases, the family finances look great for retirement; but parents still have to get over the hurdle of paying for college education for their children at a cost of $20,000 to $40,000, and for exclusive private schools that amount can hit $60,000 per child, per year.

Little-Known Secrets of Paying for College

While it’s true that for most of us, our homes are one of our most valuable assets, we are generally given 30 years or more to pay it off. For college, though, you’ll have to pay those huge costs over a four-year period, or face a lifetime of student loan debt.

Educating people about the best approach to college savings, therefore, has been an area that I’ve focused on since 2002. That’s when I created a class for parents called, “Little-Known Secrets of Paying for College.”

It is specifically geared toward teaching parents the rules of the game when it comes to paying for higher education. It is taught through the adult education program in many counties, and the goal is to help parents understand the rules of qualifying for financial aid — and to create strategies for paying for college with minimal out-of-pocket expense.

Separating myth from reality

Many parents believe that, because of their net worth or income, there is little chance of qualifying for need-based aid. Other parents mistakenly presume that aid is plentiful, and they shouldn’t have to worry about paying for college.

The key is to have and execute a strategy.

1. First and foremost, parents need to know the formulas for determining aid to draw the proverbial “line in the sand.” Armed with this knowledge, parents can determine their likelihood of garnering need-based assistance.

2. If your chances of getting money for school are good, it’s important to develop strategies for qualifying for the maximum possible award. However, if the Expected Family Contribution (EFC) result is higher-than-anticipated, we help families develop strategies for maximizing their wealth and creating sustainable long-term strategies for paying for college.

3. Ultimately, the strategies vary depending upon the financial circumstances of the family. Keep in mind that it’s possible to legally shift assets into non-assessable accounts in order to qualify for a higher level of aid.

4. It’s also possible to implement strategies to help a family receive a tax deduction of up to $8,000 per child per year. When I am working with a business owner, one approach is to shift income from the parents’ higher tax bracket to the child’s lower bracket, ultimately giving them more liquidity to pay for college.

 

 

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2 Comments to Little-Known Secrets of Paying for College: A Planning Primer

  1. by Nancy Striniste on December 15, 2014 at 6:41 PM

    Is there a suggested annual amount that a parent (who is a small business owner) can pay to their college student child as wages?

  2. by Brock Jolly on December 15, 2014 at 8:50 PM

    Great question, Nancy. Thank you. As a general guideline, there are no limits that a parent who owns a business may pay their child. However, I always remind parents that the pay should be reasonable and customary (i.e. you cannot pay your child $1,000 a hour for his IT consulting skills because he plays on Facebook all day), and should not generally violate child labor laws (some of which apply to family businesses, some of which do not). Also keep in mind that a primary objective here is shifting income from the parents (generally higher) income to the child’s (generally lower) income. As such, you wouldn’t want to pay a child $100,000 per year, as this would diminish the value of the strategy–they would owe tax on $100,000 of income just like you or I would. Depending upon the level of work that the child does and the age of the child, we have seen parents pay anywhere from about $10 an hour up to $30 an hour. Any more than that and you may be pushing your luck with the I.R.S. or other regulatory authorities. The goal here is to use the tax code wisely, not abuse the tax code maliciously. If your kids are truly working in your business, we think this can be a win-win strategy, as it reduces your tax liability and likely creates greater income for the child. What could be even better is if you take that next step and put the child’s income into a Roth IRA or a Section 529 plan to have the money grow tax-free and allow tax-free distributions.

    Of course, we know nothing about your financial situation, so please be sure to speak with your tax advisor and financial advisor to make sure that you’re doing everything correctly. Please let us know if we can help further. Thanks, Nancy, and good luck!

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