Financial aid offices across the county must be in a state of euphoria now that Congress has made the 529 tax exemption permanent. Adding to their joy is the increasing number of states making contributions to 529 accounts state tax deductible. Sadly, this will only encourage more unsuspecting families to set up these plans which will take most of them down a path paved with financial hazards. Ultimately, any family who opens one is inviting devastating consequences when the financial aid process begins and withdrawals are taken.
Colleges are likely to count their blessings for every needy student who has a 529. Such plans make it possible for the school to reduce financial aid awards dollar for dollar thereby enriching their billion dollar endowment funds.
In the financial aid formulas, students have no asset protection allowance (APA). The sad result is, each year students lose 20 cents in financial aid for every dollar they have in cash, checking, savings, UGMA and/or UTMA accts., stocks, bonds, savings bonds, mutual funds, and the like.
Parents fare better as their assets are assessed at only 5.6% per year over their allowance. A two parent family for example, with an older parent of 48, has an APA of $45,000, while a single parent of 45, only has $19,700.
It gets even worse for families who are eligible for need-based financial aid. Colleges deem this money a resource and apply the asset assessment. Next, they reduce some of their own share of the student's aid, dollar for dollar! The assessment is avoided when the owner of the account is not part of the family household, i.e. a grandparent, but the college's aid is still reduced.
Unfortunately, tens of millions of dollars per year are unnecessarily wasted by college families who are unaware of the consequences when setting up 529 Savings Plans. In fact, numerous brokerage firms have been sued and/or suspended for misrepresenting the so-called benefits of 529 accounts.
Solution: Once a family becomes aware they will qualify for need-based financial aid, and that all of their 529 monies are at risk of being assessed and worse, it is not too late and very easy to liquidate the account. The owner must contact the company managing their account and indicate they want a "non-qualified" (taxable) distribution. They will receive a redemption form and their check will follow shortly after the form is submitted.
Of course, liquidation is not without consequence either. All gains are subject not only to a 10% penalty tax, but also the applicable income tax based on the account owner's tax bracket. Nonetheless, it is certainly the far lesser evil.
Example: A family who invested $40,000 and had a $10,000 gain would receive a check upon liquidation for $50,000. Assuming a 20% tax bracket, the $10,000 gain is subject to a $1,000 penalty tax, plus a $2,000 income tax. While many families have as much as $100,000 and more, the net result here is $47,000 that would avoid a maximum of $10,500 ($47,000 x 5.6% x 4) in assessments. If the money were legally repositioned into financial vehicles not included in the financial aid calculations, some or all of it would still be there at graduation time!
Here are two actual examples of what can be accomplished when assets are legally repositioned:
Princeton University Tuition of $15,252, Financial Aid Received was $18,030. University of Tampa aid eligibility was $ 2,000. However, after repositioning, aid increased to: $28,215.
When confronted with these facts, financial aid officers nationwide have sidestepped and smoke-screened the issue with comments such as, "Depending upon the value, there will be annual distributions to pay for tuition and fees," or, "Our calculations may vary from year to year," and this most disturbing remark originating from a prestigious New England school, "Financial aid is not the issue here. Paying for the student's education is."
Since the majority of American families can no longer afford four years of tuition and related expenses without financial aid, it most certainly is the issue! Camouflaging this fact is unconscionable, but par for the course when playing the game that today's college financial aid process has become.
The following illustrates exactly how 529 Savings Plans cause families to lose thousands in financial aid.
In a 2 parent family, let's assume: an older parent of 44; 1 child, 17; AGI of $68,900; taxes paid $5,500; parent assets of $10,000; asset protection allowance of $42,100; student assets of $124:
Reecy Aresty has been a financial advisor since 1977. He has authored the critically acclaimed, "How To Pay For College Without Going Broke," an invaluable, parent/student admissions/financial aid manual. Arguably the most revealing book ever written on the subject, it is the only book of its kind also available in Spanish. In a career spanning more than three decades, Reecy has helped thousands of families send their kids to the school of their choice for less than they ever dreamed possible.
Reecy has been interviewed by financial experts on radio and television, and by many of the nation's most respected publications including Money Magazine, US News & World Report, Bloomberg News, Scripps Howard, The Washington Post, Terry Savage (personal finance columnist for the Chicago Sun Times) and Consumers Digest.
Recently, Reecy created The College Information Network™ including The High School Blog, The College Blog, Payless For College and The Way To College dot coms. A Google search for "Reecy Aresty" will result in thousands of links to sites all over the world that feature his articles, advice and methods.
Reecy presents free seminars coast to coast, and his innovative appeal/negotiating techniques have turned unappealing award letters into millions of dollars of additional financial aid. Reecy's book is a warehouse of information that makes it possible for virtually any family to beat the colleges and the federal government at their own game.
For further information contact Reecy Aresty at: 561.477.9639, or visit www.paylessforcollege.com, and never loose sight of the fact that, "The money to send a student to college IS available. Paying for college is the easy part. Getting admitted is the tough part. All the financial aid in the world is useless without an admission ticket."
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