Breaking the Small Business Code

New Spouse Pays for Step-Kids College

    Right on schedule -  I just got my annual call from a divorced parent who got remarried last year and is now trying to keep the new spouse's income and assets "off the college forms".  I usually hear lots of yelling when the new step-parent discovers that their income and assets are now included for college support.

    Then I am always told about the (1) prenuptial agreement clearly stating the new spouse is NOT responsible for the new step-kids and (2) her lawyer has put all her money into a "trust" so it's not really available anymore.  Both of which mean NOTHING to the FAFSA or FAP process!

    So here is today's teachable moment - You get married while you have children in college, the new spouse's income and assets are INCLUDED for the FAFSA if you are the tax custodial parent. They are included for the FAP regardless of whether you are the custodial or noncustodial parent!

    If your ex has tax custody (take a tax deduction), then your new spouse (and you) are not included on the FAFSA. But if your student is at a college requiring the FAP, your new spouse will be included either as the custodial spouse or the noncustodial spouse, period

     PRE-NUPTIALS:  Financial aid providers - the Department of Ed, your state and the college - were not parties to the pre-nuptial and are not legally bound to the agreement.  So the process requires that custodial parents (including step) are included in the income and asset calculation for the FAFSA.  ALL parents including steps are included for the FAP.

    TRUSTS: When parents tell me about a trust tht was set up by a new spouse, they almost always mean a "living" or inter-vivos trust.  But if the new step (or any parent for that matter) has "control and receipt" of the assets in a trust, they are included in the financial aid process.  That means a "living trust" is NOT a real "trust" for college purposes because the donor is usually the trustee and can use the assets any way they like.  The trust would have to be irrevocable and the new spouse would NOT have access to the assets for it to be "invisible" for college purposes.

    If you have any questions, make a comment or go to http://www.CollegeFundingNetwork.com and use the Contact Us form.

   

ERROR IN THE 2009-2010 FAFSA?

      The 2009-2010 Free Application for Federal Student Aid (FAFSA) contains could be a major problem in how parent and student assets are being defined.  The FAFSA Worksheet and the online FAFSA form both include UGMA/UTMA accounts in the definition of parent assets!  This is either an error or a complete redefining of what is to be included as a parent asset by the Department of Education.

      A UGMA/UTMA account is the way a minor owns financial assets until they are 18 or 21, depending on their state of residence. The asset is in “trust” to a guardian who is an adult responsible for managing the account for sole benefit of the child owner.  Most UGMA/UTMA accounts hold mutual funds, stocks or bonds in the child’s name and are usually managed by a parent or grandparent who gifted the original asset.

      Until this current 2009-2010 FAFSA, a UGMA/UTMA account(s) was listed on the FAFSA as athe filing student’s asset regardless of their age. The good news is redefining a UGMA/UTMA asset as belonging to a parent reduces and could even eliminate the impact of the asset for calculating the Expected Family Contribution (EFC)!  Unfortunately, the FAFSA then uses the exact same definition of an asset including UGMA/UTMAs for the student asset section of the 2009-2010 FAFSA.  This could lead to three potential errors for families filing FAFSAs:

1.  Listing the UGMA/UTMA as both a parent AND student asset thus counting the same asset twice for calculating the EFC,

Financial Aid for Foreign Students

This week's NACAC Conference in Seattle provided lots of information that may be of interest to many potential college students.  One is getting financial aid if you are a foreign student.

When asked if there is "traditional" need-based aid programs with state and federal grants and federally supported loans like Stafford and PLUS for non-U.S. Citizens -- the short answer is NO.  However, that does NOT mean a good student cannot receive college-based merit or need-based aid. 

There are six colleges that most of us in the industry knew will (1) admit international students in a need blind fashion and (2) meet their full financial need once admitted.  These schools include Harvard, Yale, MIT, Princeton, Williams, and Middlebury. At this week's NACAC  conference in Seattle attendees learned that Berea College, Colby College and Mount Holyoke also offer aid packages through the colleges to foreign students.

So there is good news is if you are a foreign student, some private colleges may offer aid packages if admitted regardless of citizenship.  It is more likely to happen at "need-blind" colleges meaning they will look at admitting you first regardless of ability to pay.  Once admitted, they will help meet your need with whatever dollars are legally available. 

If this is something you want to explore, check with the college Admissions and Financial staff to see what their policy on college-supported aid would be.  Also ask about the required financial aid paperwork.  Most of these colleges use the Financial Aid Profile in addition to the FAFSA so you will need to make sure you comply with their policies and due dates.

Unsettling Grandparent Question on 529 Plans

   Anyone who follows my blogs and my career as a college funding advisor knows that I am not a fan of 529 Plans as a way to save for college. In my opinion, tax-free growth of your funds is not a good enough reason to use 529s when you discover all the "gotcha's" and gray areas surrounding them!

      One of the big gotcha's used to be 529 plans would impact the Financial Aid of the beneficiary. This was changed  by the 2007 College Cost Reduction Act (CCRA). The Act specifically states that qualified distributions to a student from student- and parent-owned 529s would not be included as student income on the FAFSA and would not reduce financial aid from a college to the student.  However, there is a "gray" area involving grandparent-owned 529s that was brought to my attention today.

     Financial and tax professionals often recommend 529 plans to grandparents like me as a way to move taxable assets out of an estate but still be able to maintain control over the gifted money should the beneficiary grandchildren not go to college. There are generous gifting limits and the growth would be untaxed as long as the distributions were used for qualified college expenses outlined by the IRS.  But the distributions from a grandparent-owned 529 account were NOT specifically mentioned or exempted for financial aid in the CCRA! 

      Some financial aid experts now worry that distributions from a grandparent-owned 529 are student income.  That means they must be included in the FAFSA according to the rules that clearly state  ". . . money received, or paid on your behalf (e.g. bills), not reported elsewhere on this form must be reported."  Financial aid expert Mark Kantrowitz argues that distributions are exempt regardless of ownership based on the intent of all the regulations even if it grandparents are not specifically named.  But Joe Hurley, the CPA who is considered "THE" expert on 529s, feels the situation is ambiguous. 

       So what do you do?

  There may ways to avoid financial aid impacts by changing ownership to the student or parent. HOWEVER, you MUST work with a VERY experienced college financial and/or tax planner famiiar with 529 rules. The process for gifting and changing owners between generations for 529s can be very confusing and complex.

      Grandparent-owned 529s are now firmly in the gray area and that makes me uncomfortable recommending them.  Students applying for federal financial aid face potential legal and tax consequences if they receive disributions from a grandparent-owned 529!  If a student does not include distributions on the FAFSA and it is later found they should have been counted, there could be taxes and the requirement that aid be refunded!  If a student does include the distribution and it is later found to be exempt,  they will have potentially lost financial aid including grants and scholarships for no reason!

      If you are a grandparent with a 529 Plans, meet with the advisor who sold them to you and get a written opinion on their impact on financial aid including IRS and Department of Education citations. If you do not yet have a 529 plan, discuss other tax-advantaged ways to save for college such as trusts and insurance products like cash value life insurance and annuities.

Which Survey Category Will You Fall Into?

ORIGINAL DATE: 08/25/2008 09:54:01 PM

SallieMae recently published a very extensive survey done for them by Gallup on how the 2007 Freshman Class paid for college.  The information is both encouraging and discouraging at the same time! 

First, the good news is that nearly 90% of low income families (less than $50K in earnings) filed the FAFSA. And 97% at the lowest income levels filed!  This means that all the outreach to lower income families is paying off!  This means the maximum in aid should have been available to the most needy families.

Sadly, the numbers filing the FAFSA falls off as income rises. At over $150k, the number filing the FAFSA is about 40%.  The survey also shows that the higher the income the more expensive the college they attend.  And the more expensive the college, the more likely you are to qualify for financial aid at higher incomes!  This past year Elite Ivies like Harvard, Yale and Dartmouth offered free tuition to families earning up to $150,000!  So 60% of these higher income families left money on the table! And many of these higher earners are business owners who have many options for reducing the cost of college but don't take advantage of them - just like they don't take advantage of the FAFSA!

The next thing that grabbed my attention was that 61% of parents BEGAN discussing how to pay for college when their student started high school.  Most began thinking about college funding in the junior year or after the first admissions test like the PSAT!  This explains the survey results that most families use loans and cash flow to pay for college and not savings. 

The survey has lots of details that will help me and organizations like the College Leadership Foundation better serve our college-bound families.  One thing that became clear was college is really a parent CASH FLOW and lifestyle problem.

So where do you fall?  If you reading this blog you are probably aware of the upcoming costs of college.
So what grade level is your student?  Are you planning to file the FAFSA?  Do you have a plan in place to handle the impact of college on your debt and your lifestyle?  Do you know whose input on college planning you can trust?

May I suggest you visit the nonprofit College Leadership Foundation's website and sign-up for their free eNews that provides neutral and unbiased information for college planning.  www.CLFeCoach.org/eNews.

Scholarships that Don't Help

ORIGINAL DATE: 08/22/2008 10:49:05 AM

I recently wrote an article on Scholarship resourcing for the College Leadership Foundation's eNews (sent at no cost, so go to www.CLFeCoach.org/eNews to subscribe now).  What was cool was an eNews subscriber sent me an eMail through my website www.LindaPTaylor.com to let me know that resourcing was not always a sure thing which I had inferred in the article.

Here are 3 quick things to set up the story.  First, most scholarships are "co-addressed" which means they are awarded to the student but sent direct to the college on behalf of the winner.  Next, "resourcing" is when a college applies the scholarship money to the financial aid being given to the student - both free money and loans. Lastly, colleges have complete freedom to apply the scholarship any way they wish to aid and expenses as well as let you "keep" the money.

Apparently the subscriber's son had received several co-addressed scholarships.  The college he had selected did NOT resource the scholarships and had actually allowed him to add the scholarships to the aid he was receiving.  This meant the scholarships actually reduced the costs not being met by the college's aid package! This was UNUSUAL but became very understandable when you looked at the scholarship totals, the student and the college.

First, the total amount of the scholarships was modest and absorbing them would not really have changed the total free money he was getting from the college.  So there was not much incentive to absorb the money. Second, this student was highly desirable and allowing him to "keep" his scholarships was a good idea both tactically and politically to make their college more "attractive".  But the most important thing was this college is ranked in the fourth tier by US News & World Report.  That means they are not considered a popular or well-known college.  By not resourcing the scholarships they stood "out" from the other colleges that did both!

So does this change my position that most scholarship searches are a waste of time financially?  No, not really. As I say in my "77 Secrets to Winning Scholarships" system, you should search for scholarships SMART! Decide whether or not the money you would get is worth the effort it will take for the schools on your list. You need to know whether or not the colleges on your list will resource your scholarships based on their  policy posted in their catalog.  You need to know what your family's Expected Family Contribution (EFC) will be at the target colleges on your list so you can estimate the amount of free money you'll get. And you need to know whether or not the work to get them is worth the money and the flood of marketing materials you will get when you register on-line for most scholarships.

A REMINDER -  If you join the College Leadership Foundation's College eCoaching program which provides you with the best in neutral and unbiased college planning information, you get my ENTIRE COLLEGE SCHOLARSHIP SYSTEM as a free bonus!  That's everything - the book, the video of my 1-hour scholarship workshop, workshop PowerPoints, and lots of bonus items.  To learn more, go to www.CLFeCoach.org.

I APOLOGIZE!

ORIGINAL DATE: 04/27/2008 10:52:38 PM

It’s All My Fault And I’m Apologizing!

Here is a recent conversation I had with a mom I met at a birthday party for a mutual friend this past weekend in Orange County, CA.  After I introduced myself, she wanted to know more about what I did for a living.  Being passionate about my work, I spent about 5 minutes telling her how I help college-bound families with cash flow planning, tax capacity and minimizing debt – things she said she had never heard applied to college planning. I then asked her about her family. She told me that their daughter was graduating from UC Davis this summer after 5 years. She told me that her husband had had to postpone retiring because they had accumulated nearly $100,000 in PLUS Loans for the direct college costs as well about $18,000 they had borrowed from their home equity line of credit for the “incidentals” that kept popping up.  She had over $1,500 per month payments that were not tax-deductible. She was quiet for a minute and then asked me where I had been for the last 5 years! She was actually angry that she had never heard of people like me. I told her that fee-based college consulting is a very specialized occupation and sadly, very few “players” in the system really know how to help families in the right way.

She informed me that all she ever saw was all about either selling her something (529s, books, insurance, even the colleges) or telling her to borrow (students, parents, home, private loans).   She looked for the "free ride", did the FAFSA, read a "free report" on the "9 Secrets" from an insurance salesman, and attended every college night and seminar she could!  They spent lots of time searching for scholarships and found about $3,200 all 4 years. I then made a MAJOR mistake. I did some quick mental calculations based on what she had told me and gave her a couple of ideas that would have cut her costs in half. But before I could share some things she could do now, she told me it was MY FAULT she had all that debt and walked away, clearly upset. I was stunned but after thinking about what she had told me, she was absolutely right to be mad!  She had never been given the information I had shared!  She had told me about all the places she had gone for information – the colleges, the high school, her financial planner, her tax professional, the internet – and got nothing that helped her!  I was just a handy target for her anger. Good news is she came back later in the evening and she will be meeting with me to see if there is anything we can do now. Her husband works in law enforcement and he can retire anytime but he is still working because of all their college debt. Good news is there are ideas we can use. Then I got an eMail from Chuck Moore – one of the masters of college financial planning!  He had had an almost identical situation with the head of Human Resources at a company where he had been referred! The person he was talking to had massive debt for two children who were out of college and was angry at him for failing to let people like her know they had options! Chuck said it had really made him stop short! He felt it was partially ALL our faults in the college planning field.  We were not getting our information out to enough people!  No one knew they had options! I hate to keep repeating myself, this confirms that the College Leadership Foundation and their revolutionary College eCoaching Club is the right thing for families NOW.  Families who join the Club will have choices and options based on KNOWLEDGE that is unbiased and immediately useful.  Visit www.CollegeLeadershipFoundation.org.

Is a 529 Plan included in the FAFSA?

ORIGINAL DATE: 01/21/2008 03:58:03 PM

I just got a call from a client family confused about how to account for their daughter's 529 Plan on the FAFSA.  So to help all those families in the similar situation, here are some suggestions:

• Ownership of a 529 is the key.  The beneficiary is irrelevant for the FAFSA.
• If a parent owns the account, it IS included in the parent's asset total.
• If grandparent's own the account, it is not included in the FAFSA.
• If the student owns the account, the asset is not included on the FAFSA.  NOTE - if the student is under 18 (age 21 in some states and circumstances), the account is usually held in a UGMA/UTMA status.  That means it is owned by the "child" but a custodian has authority to make decisions on the account.  So a UGMA/UTMA 529 Plan is NOT included on the FAFSA.
• 529 Plans for other non-college aged students are included in the parent's assets.

These guidelines ONLY apply to the federal FAFSA.  So if your student is applying to colleges requiring the CSS Financial Aid Profile, you will need to answer their questions about 529 plans REGARDLESS of ownership.