Here are ways to reduce the financial burden of higher education.
The burgeoning cost of college isn't just a strain for low and middle-income families. Affluent Americans are wrestling with how to pay for higher education, too.
There was a 62% increase in the number of students overall that applied for federal financial aid for the 2011-12 academic year, compared with five years earlier, according to a recent report from the National Association of Student Financial Aid Administrators.
Additionally, the proportion of subsidized student loans going to those with family incomes of $100,000 and above doubled to 14% in the 2011-12 academic year, compared with the 2007-08 period.
“Even wealthy people are struggling to save enough money to send kids to college,” said Megan McClean, the managing director of policy and federal relations for NASFAA. “Folks from all different levels of the income spectrum are needing to borrow to pay for college.”
Fears about college costs are an opportunity, though, for those who familiarize themselves with strategies that can help even wealthy parents minimize out-of-pocket costs and best use family resources.
Today, college costs an average of $19,000 a year for fees, room and board at in-state public schools and $33,000 at out-of-state public colleges, according to the College Board.
The average cost at private universities is $42,000 a year, and the price tag is more than $60,000 at many elite schools.
“Even wealthy people are struggling to save enough money to send kids to college,” said Megan McClean, the managing director of policy and federal relations for the National Association of Student Financial Aid Administrators. “Folks from all different levels of the income spectrum are needing to borrow to pay for college.”
STICKER PRICE
“Nobody pays the sticker price if they know what they're doing,” said financial adviser Joseph Orsolini, founder of College Aid Planners.
Generally, the non-elite private colleges will give students more merit aid, or “free money,” than state universities, he said. The key is finding a school where the student would be in its top quartile.
For instance, one couple that earned about $115,000 a year and had $45,000 in assets outside their home and retirement, was awarded $14,000 of free money and given the standard $5,500 direct federal loan, bringing the cost for attendance at the chosen college down from $38,270 to $18,770 a year, Mr. Orsolini said. They would have had to pay up to $31,000 a year for the other schools that the student was accepted at, he said.
Many people focus on trying to lower the EFC, or “expected family contribution,” a figure the government comes up with based on the FAFSA and which institutions use to determine financial aid.
Strategies include shifting assets from vehicles that lower aid awards such as checking accounts, savings, investments, trust funds, vested stock options, college savings plans, collectibles and rental properties to those that aren't factored into aid calculations, such as retirement funds, home equity (not included in most methodologies), life insurance cash values, annuities, small businesses, cars and other personal assets, Mr. Emerich said.
Whether the child or the parents own the asset also matters, as aid formulas expect children to spend down a greater percent of their assets on their education than they expect from their parents.
For instance, a student with $85,000 saved in a Uniform Transfer to Minors Act account would have $17,000 count against the family for financial aid because the student owns the asset, Mr. Orsolini said. If the parents were to transfer that amount to a Section 529 plan (which are considered to be a parental asset as far as financial aid is concerned) only $4,800 would count against that family for that $85,000 account.
But Fred Amrein, founder of Amrein Financial, warns that lowering the EFC can also have an unforeseen impact on college admissions.
Increasingly, a student's ability to pay for college is becoming more of a factor when schools are determining whom to accept, he said. If a student is especially “attractive” for their academic talents or other reasons such as being a star lacrosse player, then lowering the EFC isn't likely to adversely affect their acceptance, he said.
For the average student, though, or one who is “reaching” to be accepted, financial aid applications that show the student will be able to afford to go to the school can make them more attractive to schools, which seek to generate a certain average revenue per student, he said.
“The push to lower EFC is not as attractive as it used to be for families,” he said.
TAX STRATEGIES
There are other ways to help reduce college costs that even wealthy families can take advantage of, though.
Another important area to explore is “tax aid,” said Troy Onink, chief executive officer of Stratagee, a college planning consulting firm.
This is helpful for families that cannot qualify for need-based aid no matter how assets are shifted, he said.
“The idea is to achieve tax savings to help lower the overall cost of college,” Mr. Onink said.
As an example, take a couple whose modified adjusted gross income is too high to make them eligible for the American Opportunity Tax Credit. The parents could gift their child securities that have appreciated over a number of years. If children provides greater than half of their own support (or half of the cost of college) using their income and assets, they can claim the $4,000 personal exemption, use the full $6,300 standard deduction and the $2,500 American Opportunity Tax Credit to offset up to $26,000 in capital gains on those securities.
Using this strategy, the parents never pay capital gains on the asset appreciation. It does, however, require the child to claim their own personal exemption instead of allowing the parents to do so, he said.
Every situation is different and particular to each family.
“The benefit of being wealthy is that you have more options,” said Michael Mariano, a principal and tax professional with TrueWealth.
