Robert C. Alario CPA PC | College Planning |

SAVINGS
Education Savings Accounts (ESA)
Parents or Grandparents can now contribute up to $2,000 per year, per child under age 18. The phase-out limits are married filing joint $190,000 - $220,000, and for single filers $95,000 - $110,000. Contributions can be made up to April 15, 2007 for the year 2006.

Tax-free withdrawals of funds can be used to pay for elementary, secondary, or higher education. The government does not tax the appreciation on the funds. The investment decisions are totally controlled by the donor. Contributions are not tax deductible.

Funds must either be used by the time the beneficiary reaches age 30 or transferred to an educational savings account for a younger family member.

Section 529 Plans
Contributions up to $60,000 per child can be made with no gift tax implications if the donor elects to treat the gift as made over five years. There are no limits on the donor’s taxable income. 529 plans have maximum funding caps per child. The cap will vary by state plan but will be in the $250,000 range.

Withdrawals are tax free to fund higher education only. The donor may choose government directed age based portfolio investments or investments with greater choice and control. Specific investment options are determined by the plan sponsor. The donor can choose one of fifty state sponsored plans.

Unused funds in the account can be transferred to a 529 plan for another family member. Non qualified plan distributions are subject to tax and a 10% penalty.

Commercial College Savings Incentives
There are some excellent college credit card reward programs (typically 1% or 2%) and savings clubs programs (up to 10% on purchases) that help you build college savings by contributing a percentage of your purchases to a 529 plan. Compare programs at http://www.529rewards.com/ such as Upromise and Baby Mint. Small steps, or in this case baby steps, can lead to big rewards.

For help in determining how much you need to save try the financial calculators on our web site. Select Financial Calculators/Savings Calculator/College Savings.

FINANCIAL AID
When deciding on how much financial aid a family gets, the government and colleges look at the assets and income that parents and children have in the years immediately before and during college. Particular attention is paid to the calendar year that runs through December of the child’s senior year at high school. Minimize income, minimize capital gains, and maximize retirement contributions for that year in particular.

Under the federal financial aid formula, children are expected to put 35% (20% as of July 1, 2007) of their own savings toward college costs each year, while parents are expected to fork over a maximum of 5.64% of the money in their names. Spend down your student’s assets first.

Under the federal formula, money in regular taxable accounts is considered when deciding on aid eligibility, but home equity, retirement accounts and cash-value life insurance are ignored. Parent owned Coverdell ESAs and Section 529 plans are considered assets of the parent. Grandparent owned 529 plans are not considered assets of the parent or donor.

When assessing your family’s aid eligibility, the federal formula looks only at debts that are secured by assets that are listed on the financial-aid form. For instance, margin loans taken out against your brokerage account are considered, but credit card debt is ignored. If you have $10,000 in a bank account and $10,000 in credit card debt, a regular banker would say your net worth is zero. But under the aid formula, you have assets of $10,000. Pay down your current credit cards and auto loans to reduce your assets.

There is a wealth of information on the internet regarding funding college costs. Try the Financial Aid Information page www.finaid.org and College Board Online, www.collegeboard.org. They can answer many of your questions about the financial aid process, include interactive calculators to estimate your expected contribution amounts, and provide search engines for scholarship and loan money. The U.S. Department of Education puts out an excellent publication on federal financial aid programs and borrowing: The Guide to Federal Student Aid 2007-08 which you can download at:
http://studentaid.ed.gov/students/attachments/siteresources/FundingEduBeyondHighSchool_0708.pdf

The two most common government sponsored loans are the Stafford and Plus loans. The Stafford loans are those that students borrow themselves. Safford loans first disbursed after July 1, 2006 have a fixed rate of 6.8%. Dependent undergraduate loan amounts are limited, and effective July 1, 2007 are capped at $3,500 the first year, $4,500 the second and $5,500 the third and fourth. Eligible borrowers can get part or all of their loans subsidized, meaning that the government pays the interest while the student is in school. Repayment begins 6 months after graduation or when enrollment drops below half-time.

Plus loans are those the government sponsors for parents, available without regard to income or assets. FFEL Plus loans are fixed at 8.5% and Direct Plus loans are fixed at 7.9%. (Whether you borrow a FFEL or Direct plus loan will depend on which program the specific school participates in.) The yearly limit on a Plus loan is the cost of attendance less other aid. Repayment of the loan must begin immediately. If a parent is denied a plus loan (credit approval required), the student will be eligible for higher Stafford loan limits.

Spend all the child’s assets before the child borrows. Have the child borrow first (even if you plan to pay). They are likely to get better rates on the Stafford loans and can defer payment. Also, your child is more likely to benefit from the new loan interest deduction.
A preferred method of borrowing for the parent may be a home equity line of credit. The interest may be deductible on loan amounts up to $100,000.
Pay off consumer debt such as credit cards and auto loans.
Accelerate necessary expenses to a date prior to completing FAFSA.
Don’t take money out of your retirement account to pay for education. The retirement assets are sheltered from the needs analysis formula.
It may be a mistake to have grandparent’s gift or pay tuition. Have them wait until after graduation and offer to repay loans.

In addition to need-based aid, try for merit-based aid. To increase your child’s chances:

Apply to schools where your child is in the top 25% academically.
Apply to schools out of your geographic area. Schools want the diversity and your child may be more likely to get merit-based aid.

Education Tax Breaks:
The Hope Scholarship credit is available for tuition paid in 2006. The credit is calculated at 100% of the first $ 1,100 of tuition plus 50% of the next $1,100, up to a maximum of $1,650. The student must take at least a half time load in one semester, and be in his or her first two years of college.

The Lifetime Learning credit is available for tuition paid in 2006. It’s intended to help with college expenses that are not used to qualify for the Hope credit (i.e., college costs after the first two years), plus other post-secondary education costs to acquire or improve job skills. The credit is 20% of annual tuition up to $10,000, or a maximum of $2,000 per year. This modest cap applies regardless of how many eligible students you may have in your family.

Qualifying expenses for both the Hope and Lifetime credits include tuition and fees (but not room and board, books, student activity fees, transportation, etc.) for you, your spouse, and any other person who can be claimed as a dependent on your tax return. However, there’s a catch: both credits are phased out between adjusted gross income of $90,000 and $110,000 for joint filers and between $45,000 and $55,000 for single taxpayers.

In 2006 an above the line Education Deduction of $4,000 is available for married taxpayers with AGIs up to $130,000 or $2,000 for AGIs up to $160,000.Single taxpayers are allowed a $4,000 deduction for AGIs up to $65,000 and $2,000 for AGIs up to $80,000. Eligible expenses are the same as for the credits above, the deduction can be taken for undergraduate or graduate education, and the student can be enrolled only part time.

Coverdell Educational Savings Accounts (ESA) allow you to make contributions of up to $2,000 for anyone under 18 years if age if your AGI is under $220,000 for joint filers or $110,000 for single filers. The contributions are not deductible. Funds in the account are not taxed and distributions are tax free if spent on qualifying educational expenses.

There is a deduction for interest on college education loans. Up to $2,500 in interest paid on an education loan can be deducted. This deduction is phased out for joint filers with AGIs between $105,000 and $135,000, and for single filers with AGIs between $50,000 and $65,000. For AGIs too high, borrowing money in the child’s name may enable the child to benefit from the deduction once he/she is no longer a dependent on the parent's tax return.

The ROTH IRA, in addition to being used as a retirement vehicle, offers college savings opportunities. Up to $4,000 ($5,000 if age 50 or older) per year per individual (subject to AGI limits of $160,000 for joint filers and $110,000 for single filers) can be put into a ROTH. ROTH IRAs allow penalty free and tax-free withdrawals of contributions, but the growth will generally be taxed if you take them out before age 59 ½ to pay college bills.