Contrary to popular belief, much of the anticipated debt can be legally eliminated if the appropriate action is taken at the proper time and before it is too late. Help is on the way in the form of proven financial strategies that make virtually any college affordable.
For example, most families are unaware of the fact that students have no asset protection allowance in the financial aid formulas. For college year 2007-2008, students will lose 20% of every dollar they have in cash, savings UGMA & UTMA accounts, stocks, bonds, savings bonds, mutual funds, and the like.
Parent assets are subject to a different formula and school selection is a key factor in ultimately determining the amount of financial aid. There are two categories of schools:
Category 1 includes a few select state colleges plus approximately 225 elite private schools. In addition to the Free Application for Federal Student Aid, (commonly known as the FAFSA), they also require the CSS Financial Aid Profile (FAP).
If you thought the FAFSA was difficult, the FAP is a nightmare, and pity the poor family who's divorced, separated, or owns a business or a farm. Such families are required to complete an additional form, The Business/Farm Supplement (you'll need your accountant), and/or The Noncustodial Parent's Statement (be nice to your ex). These colleges take into account all of the above plus home equity, Coverdell Education Savings Accounts (Education IRA's), the refund value of Prepaid Tuition Plans and 529 Savings Plans.
Category 2 schools (all the rest), only require the FAFSA and exclude the value of the primary residence or a farm, provided the family lives on it.
Parent assets are subject to a 5.6% annual assessment over their allowance, which increases with age. The asset protection allowance for a two parent family with an older parent of 48, is $45,000. A 45 year old single parent is only allowed $19,700.
While this is certainly cause for concern, it is not cause for alarm. The good news is that with proper asset repositioning, parents and their students can appear penniless in the blink of a financial aid officer's eye by legally repositioning their money into financial vehicles excluded from the calculations.
Once accomplished, repositioning makes it possible for families with students already in college to re-file their financial aid forms and qualify for additional aid for each of the ensuing years.
Note: Even more money can be saved when implementing income planning strategies. As the formula for parent income is much more complicated and not germane to this discussion, I have addressed it in one of my other articles.
The following illustrates exactly how student income affects financial aid:
1. In the financial aid formulas, students have a $3,000 income protection allowance, but for every additional dollar earned they lose 50 cents in financial aid:
Example:
$5,000 earned - $3,000 exempt leaves $2,000 subject to the 50% assessment = $1,000 lost in financial aid.
Tax consequences: The $5,000 earned is subject to 7.65% in social security and Medicare resulting in an additional $383 lost!
2. If the student has larger earnings, it looks like this:
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