Paying Less for College: Funding the Tab
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Transcript of Paying Less for College: Funding the Tab
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
Money Coach Road Map SeriesPaying Less for College: Funding the Tab
Effective Strategies That Protect A Retirement Nest Egg
Presented to Merrimack Valley Estate Planning Council
September 6, 2011
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
CONGRATULATIONS!
Your clients have at least one student going to college.
They obviously have:
a.) Smart Kids
b.) Motivated Them
c.) A Willingness to Invest in their kids
d.) A Success Problem
Money Coach Road Map Series
Paying Less for College
Presented by Steve Stanganelli, CFP®
aka Spencer’s Dad
They Grow Up Fast!
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
3M H.S. Grads/Yr
2M H.S. Grads/Yr Apply for College
The Competition
The Applicant Pool
Boston College
1998 16k Applicants
$27k/Yr
Boston College
2009 31k Applicants
$54k/yr
Dartmouth 1998 10k Applicants
$29k/Yr
Dartmouth 2009 30k Applicants
$52k/Yr
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The Selection Process
Applicant Profile for Top Rank Schools & Ivies:
• Top 5% (about 100k applicants)
• GPA: 3.7+
• SAT: 720+
• Reading Scores: 56% > 700
• Math Scores: 57% > 700
Process Looks More Selective Because of Expanding Applicant Pool
TIP: Look at Colleges Where Credentials Rank the Student in Top Quartile for That School
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
Clear View Wealth Advisors, LLC.
There are two very different prices for college — one for the informed “buyer” and one for
the uninformed “buyer.”
Which price will your client pay?
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
Top PARENT CONCERNS in order of importance
1. Fear parent death before children are grown
2. Saving for retirement
3. Job security
4. Saving and paying for college
College Costs Keep Going UP!!
Increasing 2-3x rate of inflation
2010 Annual Average Costs:*
1. Public University - $16,000
2. Private College - $37,000
*College Board – Trends in College Pricing 2010
Current Problem
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Parent Concerns
What Concerns Parents About College
• When to begin planning
• What needs to be done
• Finding a “good fit”
• Paying for college without going broke
• Increasing difficulty of gaining admission to better schools even for well-qualified students
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College – Still Worth It?
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NEW YORK TIMES (5/18/2011)
“Median starting salary for students graduating
from four-year colleges in 2009 and 2010 was $27,000, down from
$30,000 for those who entered the work force in
2006 to 2008.”
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
Funding the College Tab
2007 2008 2009 2010 20110
5
10
15
20
25
30
Parents %
Parents %
Percentage of Projected Costs Typical Family On Track to Cover
Source: Fidelity & Investment News, 8/29/11
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
Concept 1:
College is a retirement problem:
Every dollar going toward college can’t go toward retirement
Parents are entitled to a life after college
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Concept 2:
Saving ON College is Different than Saving FOR College
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Two VERY EMOTIONAL NEEDS competing for the same limited resources
Will parents be able to accomplish BOTH?
The College Funding /Retirement Savings Dilemma
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Avoid “Sticker Price Shopping”
Integrate College Search with Financial Strategy
Find a School That Matches Interests & Abilities
Don’t Obsess Over Brand Name Schools
Plan to Optimize the EFC
College planning -- there is no one size fits all solution.
Secrets to reducing the high cost of college
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Sticker Price Shopping –
Don’t Be Deceived
College A College B College C
Cost of Attendance $20,000 $30,000 $40,000
EFC from FAFSA ($10,000) ($10,000) ($10,000)
NEED $10,000 $20,000 $30,000
Avg % of Need Met 60% 70% 80%
Estimated Award $6,000 $14,000 $24,000
Estimated GAP $4,000 $6,000 $6,000
Potential Net Cost $14,000 $16,000 $16,000
Estimates do not reflect any specific college statistics
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College Total Cost of Attendance (in-state)
% of Students paying full price
Avg. Net Price
Avg. Net Price
Marquette $39,600 22% $24,900 $29,700
Middlebury $52,500 52% $21,700 $36,200
Princeton $49,800 43% $16,510 $24,600
U of GA $16,800 25% $10,600 $10,900
U of TX $21,900 51% $20,200 $21,000
The Real Cost of a Degree
Avg. Net Price for households with income between $75k and $110k and receiving federal aid
Source: MONEY, Sept 2011, page 120; Department of Education 2008-09 academic year
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EFC = $15,000
Formula:
Financial Need = Cost of Attendance - EFC
College Cost of Attendance EFC Financial Need
1. James Madison $21,000* $15,000 $3,988
2. Georgetown $54,000* $15,000 $38,880
*Source – College Board 2011
For financial aid candidates:
Your EFC is the primary determinant for your out-of-pocket college costs, NOT the cost of the college!
Don’t eliminate consideration of schools with higher “sticker prices!”
Example of financial aid eligibility
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Financial Aid Formulas are INCOME Driven and Not Asset Driven
Understanding Financial Aid
It’s Key To Understand the Financial Aid Strength & History of Each School
Parent IncomeMax Assessment = 47%AFTER ALLOWANCES(between 22% - 47%)
Student IncomeFM Assesses: 50% after first $5250IM Assesses: $1550 min, then 50%
Parent AssetsMax Assessment: 5.64% AFTER ALLOWANCES
Student AssetsFM Assesses: 20%IM Assesses: 25%
Parent Contribution + Student Contribution = Expected Family Contribution (EFC)
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Understanding Financial Aid – Basics
Federal Methodology (FM) Institutional Methodology (IM)
Uses FAFSA Uses FAFSA & CSS Profile
Student Assets Assessed @ 20% Student Assets Assessed @ 25%
Student Income Assessed @ 50% with $5,250 Allowance
Student Income Assessed @ 50% with No Allowance
Parent Assets Assessed at 5.6% with Exemption Allowance Depending on Age
Parent Assets Assessed at 5% with Lower Exemption Allowance Based on Family Size
Parent Income Assessed Between 22% to 47%
Parent Income Assessed Between 22% and 47%
Does NOT Assess Family-Owned Farms or Businesses with < 100 FT Employees
Assesses Farm and Business Equity
Does NOT Assess Home Equity DOES Assess Home Equity
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Leverage other strategies
Leverage financial aid enhancing strategies
EFC FAFSA / PROFILE
Foundation for effective college planning
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Saving ON the cost of college
Cost-Cutting Strategies for Every Family Regardless of Financial Need Status
Some Examples: - • Take Tests for College Credit
• Advanced Placement (AP) Tests • College Level Examination Program (CLEP)• Proprietary Self-Study Option: DSST • International Baccalaureate (IB)
• Go to a Local State School for A Degree or Transfer Credits• Pursue a Degree at a Lower-Cost School Abroad • Pursue Private Scholarships like Kiwanis or Rotary• Pursue Merit Scholarships (see www.Petersons,com)
• NOTE: Private schools offer more than public (Ivies do not offer)
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Saving ON the cost of college
“Tax Scholarships”
Structuring Your Income, Business and Tax Filings to Maximize Tax Savings
Money Saved on Taxes Worth More Than Financial Aid
Examples:
Implementing Employer-Provided Education Benefits
Gifting Appreciated Investments
Gifting Depreciated Business Assets
Refinancing and Using Proceeds for Immediate Annuity
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
Sources for:
• Estimating EFC before hand. How much will you be expected to pay?
a. Finaid.org
b. CollegeBoard.org
Helpful Resources
• Strategies for increasing financial aid eligibility
a. Book: “Paying for College Without Going Broke”
b. Website: Finaid.org
• Resources for Finding Scholarships
a. Websites: FastWeb.com, CollegeBoard.com, Petersons.com, ScholarshipCoach.com, ScholarshipExperts.com, CollegeCashPros.com
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Cheap
Options
• School merit-based scholarships• School need-based financial aid• Grants - Pell
• College Savings• Other loans: Private/PLUS/Home Equity• Third party – grandparents, relatives
• Subsidized loans – Stafford, Perkins
Source
Free
Gap
Planning for financial aid
Strategies that increase financial aid eligibility will
reduce out-of-pocket college costs, the gap and need for
debt financing
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Late-Stage Planning for Higher Income Clients
Clients May Consider the Following:
Take Hope & Lifetime Learning Credits
Use Another Family Member’s Lower Tax Bracket
Employ Their Children
Establish an Educational Assistance Plan Through Client’s Business
Use Smarter Borrowing Techniques
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What NOT TO DO: The less you know, the more you pay
Fact: Gifting money to financial aid candidate will reduce financial aid eligibility
Result: Cost the family $$$ in financial aid lost!
Example: Grandparents gift $10,000 to grandchild for college, may cost the family as much as $7,000 in financial aid!
Lack of knowledge results in lost financial aid
Strategy: Wait until after college to gift – help pay off student loans. No lost financial aid.
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Knowing WHAT TO DO – the more you know, the less you pay
Facts: Family income of $57,000. Assessable assets of $200,000
Strategy - Reduce AGI below $50,000 by contributing to retirement accounts
Result - Family qualifies for “Simplified EFC.”* Assets of $200,000 are not included in financial aid formula and family qualifies for significantly more financial aid. * Note: Assumes filing a 1040EZ or 1040A
May save parents $$ over four years!
What will savings on college costs AND increased retirement account contributions mean for retirement income and quality of life?
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Knowing WHAT TO DO – the more you know, the less you pay
Strategies for Increasing Need-Based Aid:
Controlling or Changing the Position of Assets
Some Examples: -
• Don’t Hold Assets in Your Child’s Name
• Maximize Non-Assessable Assets: IRAs, SEP IRAs, Roth IRAs, 403bs,
401ks, Annuities, Cash Value Life Insurance
• Don’t Overestimate the Value or Your Home, Other Real Estate or Business
• Restructure Your Debts (Ex. Refinance Credit Cards to Lower Home Equity)
• Pay Off Debts or Make Needed Purchases = Show Less Cash
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Options
• School merit-based scholarships
• Savings strategies
• Cash flow strategies
• Income and asset planning strategies
• Strategies for business owners
• Strategies for grandparents
• Tax credit strategies
• Gifting strategies
• Loan strategies
Source
Free
Gap
Planning for high income late starters
The cumulative effect of implementing and coordinating
the right strategies can be significant savings on out-of-
pocket college costs
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Facts: Parents income too high to qualify for education tax credit. Limited benefit from personal exemption. Plan to liquidate appreciated assets to pay for college OR “write a check.”
Effect: Parents will pay capital gains (can increase real cost of college), no benefit from tax credit. If paid with after tax income, the real cost of college is twice the “sticker price”.
Better Strategy: Gift appreciated assets to child to help pay college costs. Child fulfills requirement for tax independence during college years and qualifies for education credits. Child pays NO tax due to deductions
Better Results: • Parents maintain control of asset until senior year of H.S.
• Increased cash flow – don’t use after-tax income
• Student qualifies for education tax credit
• Tax savings
• Parents – on capital gains = $$$
• Student - education tax credits – as much as $2,500/year based on 2010 maximum credit.
Example
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Case Study: Late-Stage/High Income
Student: Jay , entering high school, not a candidate for need-based aid
College: Colby
Cost of Attendance: $54,000 (1 year); $244,400 (4 years)
EFC: $54,000
Parents: Own Contracting Business and Rental Properties with Fully Depreciated Assets
Tax Bracket: 33% combined Federal & State
BASE YEAR INCOME (AGI): > $135,000
______________________________________________________________
POSSIBLE SOLUTIONS:
Family Limited Partnership
Gift of Business Assets with Leaseback
Crummy Trust to Shift Income/Maintain Control
Employer-Sponsored Education Assistance Program
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Savings from Tax Strategies: $12,508
• $11,147 (Federal – one year)
• $1,361 (State – one year)
Lower Owner’s Draw and Shifted Income to Cover Hiring Son – Save $1500 in Income Taxes
Implement EAP – Save $1400 in Income Taxes
ROTH IRA for Son’s Earnings
Gift $52,000 of Business Equipment to 4 Children and Pay Rental Rate – Save $1700 in Income Taxes
INCOME STRATEGIES
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Cash Flow Strategies
BORROW SMART with a PLAN
Refinance Home and Use Proceeds to Fund Immediate Annuity
• Increases Interest Deduction (possible tax savings of $3,000)
• Annuity Payments Guaranteed and Fixed
• May Improve Cash Flow
• Negligible Tax & Financial Aid Implications
Increased Cash Flow During College $26,686
PLUS Loans $236,000
PLUS Pymts (13 Yrs @ 7.9%) $342,661
Immediate Annuity Pymt (10 Yrs) $263,600
Total Shortfall Using Annuity to Offset $79,076
Tax Savings Due to Refi $34,118
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Goals:
1. Return exceeds college inflation
2. Tax-deferred growth
3. Tax-favored access for college
4. Favorable for financial aid
5. Can be used for college AND retirement
6. Tax-favored access for retirement
Consider savings and funding vehicles that meet the following objectives.
1. Funds for college
2. Savings for retirement
3. Minimal impact on monthly cash-flow
4. Appropriate for college AND retirement - flexibility
Savings and Funding Strategies
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Wow, So many options, but which is the
right one for my family?
Stocks
CESAEE Bonds
529
Comparison of Options – how do they rate?
Option Pros Cons
Roth IRA Accessed Penalty Free
Earnings May Be Counted as Income for EFC
529 College Savings Plan
Growth Tax-Deferred & Withdrawals Tax Free
Assessable Asset for Financial Aid
CollegeSure CDs
Low Risk / FDIC Insured
Assessable Asset for Financial Aid
UTMA / UGMA Taxed at Child’s Rate for first $1800 generated
Subject to “Kiddie Tax” if account generates > $1800/year
Retirement Plan at Work
Tax-deferred / Loan possible
Distributions fully taxable
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Achieving the best outcome
College financial planning – newborn through senior year in high school
Timeline
College admissions and financial aid process Begins junior year in high school and extends throughout college years
College Planning
l l l l l l l l l l l l l l l l l l l l l l
Tactical Planning
0 1 2 … 17 18Age of child
Help you work toward a best outcome
1. Lowest out-of-pocket costs for family
2. Best college fit for student
3. Combine longer-term strategic planning with nearer term tactical moves
BEST COLLEGE at the RIGHT PRICE … without you going broke or busting your retirement nest egg
Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
The KEY CONCEPTS Cheat Sheet:
• Define “Financial Need”
• Calculate EFC
• Optimize the EFC
• Proper Planning Leads to “Tax Scholarships”
• Employ Cost-Cutting Alternatives
The Money Factor: Takeaways
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Clear View Wealth Advisors, LLC, A registered investment advisor.
Informed or Uninformed :
Your Clients Have a Choice
__
Which type of buyer of a college education will your
client choose to be?
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ABC Company TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR
Securities and advisory services offered through LPL Financial, A registered investment advisor. Member FINRA/SIPC
Informed or Uninformed – Which
buyer of a college education will you
choose to be?
Uninformed buyer!