When college is just around the corner
Here's how families can position their assets to win the most financial aid
Arthur Abbott cheered when the first of his three sons decided to attend Boston College in the mid-1990s. The other two followed - Michael, the youngest, is now a junior - giving Mr. Abbott and his wife, Jeanne, two more reasons to feel vested in the school from which they both graduated in 1970.Skip to next paragraph
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But from time to time, the Abbotts' gold-and-crimson pride has been tinged with panic. Instead of the roughly $2,000 a year they paid back in their day, tuition, room, and board have soared to more than $40,000.
So how do the Abbotts - or any moderate-income couple with children in college or about to enter - cope with such skyrocketing costs? Carefully. The good news: Even if you haven't spent years socking away a small fortune for junior's education, there are ways to position yourself so he or she can win maximum government and institutional aid, experts say.
"The poorer you look, the better your chances," says Peter Bielagus, a financial planner in Bedford, N.H.
The first step, surprisingly, is to raid your child's bank account. "Across the board, people should realize that the worst way to save for college is in the child's name," says Harold Simansky, an investment adviser and founder of Educational Investments in Chestnut Hill, Mass.
That's because of the way colleges calculate the estimated family contribution - what a family should pay before aid kicks in. Anywhere from 2.6 percent to 5.6 percent of parents' assets are expected to go toward each year of college costs. It leaps to 35 percent of student assets. Mr. Bielagus and others suggest that a student's cash be burned through about a year before the paperwork - beginning with the all-important FAFSA, the Free Application for Federal Student Aid - gets under way. Think laptop, not Florida trip.
"If you have a $3,000 computer," says Bielagus, "that will not show up" in aid calculations.
At the very least, shove it into a 529 saving plan, which is viewed as the parents' asset, even with a student cited as a beneficiary.
Also sometimes worth shielding: home equity, the single greatest asset of most Americans. As a general rule, public colleges and universities won't count it when figuring aid. But it can be a factor at private schools.
Experts caution that lowering home equity won't produce a dollar-for-dollar benefit in aid eligibility, and many warn against extending a new mortgage deep into retirement years. But it can be a cheap way to borrow money.
The Abbotts, for example, refinanced their mortgage shortly before their first child applied for aid, and used the funds to build an addition they had long wanted. Lowering their home equity helped win them more aid, Abbott says - as did having two sons enrolled at once during several overlap years.
Because families with more than one child in college often get more aid, one bold strategy is to delay a slightly older child's matriculation to allow a younger child to reach college age, Bielagus says.
But he cautions that the plan can backfire if a year in Europe turns into five, or a would-be lawyer in a holding pattern as a ski instructor decides on a career change.
Timing is also key in other ways. Meeting aid-application deadlines with accurately completed forms is essential, experts agree. And getting assets squared away early in the aid process - typically in February and March - can make all the difference in how you are sized up as an aid candidate.
The day you fill out the federal aid form or College Scholarship Service profile you are effectively rendering "a snapshot" of your financial status, says Dan Cosgrove, a financial representative at Guardian, a life-insurance and financial-services firm in Boston.
"The day before, you can have $45 million and move it," he says. "So you make those moves" before filling out the paperwork.
Asset-shifting can be done as late in the game as February in a high school student's senior year, says Mr. Cosgrove. So where to quietly park funds? One possibility is a life-insurance policy, from which loans can be taken and principal withdrawn tax-free under most circumstances. (Make sure premium payments do not exceed the level that could raise red flags with the Internal Revenue Service.)