Dear College Money Guru,
Any help for procrastinators? We are at the eleventh hour, with a daughter applying to college for next fall. Are there any moves you might suggest before we fill out CSS Profile and FAFSA forms to maximize her eligibility for financial aid? Currently, she has cash in a savings account from her own earnings and a custodial brokerage account. We have money in a mutual fund intended for education but never moved to a 529 account.
I understand awards are based on amounts in the accounts the day you complete forms, but I am concerned that we have several upcoming expenses (orthodontia, major home and car repairs) that significantly reduce our available funds. Is there any advantage to opening a 529 plan now? What about 529 funds for younger siblings? Thanks for anything you can suggest.
If you haven't already, first spend some time with online aid-eligibility calculators to get an idea of where your daughter stands regarding financial aid. You can find good ones at Collegeboard.com and Finaid.org. You could also look at college Web sites. Many will post general information about student aid and some will have their own eligibility calculators.
If it looks like your daughter is in the running for need-based financial aid, then start thinking about moves you can make to maximize eligibility. Because investment assets in her name are counted heavily in the aid formulas, you might look for ways to "spend down" the custodial account by using it as the funding source for your daughter's share of auto insurance, vacation and other expenses.
However, you must take care when liquidating investments in the custodial account for two reasons. First, any gains reported on this year's tax return might reduce next year's aid eligibility. Dependent students have a $3,750 income protection allowance, along with allowances for federal, state and Social Security taxes. Income above the total allowances is assessed at a 50 percent rate in the calculation of her federal expected family contribution, or EFC.
The second reason for caution is the so-called "kiddie tax," which causes a child's investment income to be taxed using the parents' marginal tax rate. With some exceptions, the kiddie tax applies to students under the age of 24 who have unearned income of more than $1,900. If your daughter's capital gains and other investment income stay below that level, she is taxed entirely within her own brackets, which could be zero percent for a large portion of that income.
Naturally, it can be more difficult to get your daughter to part with her own hard-earned savings, especially for expenses she normally expects her parents to pay. However, you may be able to convince her to move that money into a 529 plan. Even when the 529 account shows her as the beneficiary and the owner, federal law says that it is counted as a parent asset in determining EFC. Parent assets are assessed at a rate of 5.64 percent or less compared with the 20 percent assessment rate on student assets. You can make the same move to a 529 with any unspent funds in the custodial account, and further reduce EFC, but be careful when triggering capital gains to avoid creating tax or financial aid problems.
Opening 529 accounts for younger siblings will not help federal aid eligibility, assuming you name yourself as owner of the account. The money is counted as a parent asset whether held in a 529 account or in a non-529 account. Conceivably, you could put the 529 accounts in the siblings' own names to remove them as parental assets, but you then also remove your ability to change account beneficiaries in the future or to retain control of those accounts when the children reach adult age -- generally 18 or 21.
If you pay down your mortgage and other debts and make other major cash expenditures prior to submitting the financial aid application, it will have only a modest impact on reducing EFC at the 5.64 percent maximum assessment rate on parent assets. It will reduce your assets, assessed at the 5.64 percent rate, but it doesn't reduce your income, the major determining factor in EFC. Because parent income is assessed at rates as high as 47 percent, you might do yourself more good by looking for ways to reduce your reportable income.
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