In: Root » Legal and finance » Wealth building
Even some of the wealthiest Americans, using creative but legal loopholes, feed at the trough of public and private college funds. One perfectly legal ploy is to lower your income in the first crucial tax year that colleges focus on when determining how much you'll have to pay. That year starts on January 1 of your child's junior year in high school, and it ends on December 31 of that same calendar year (at which time Junior will be a senior). If you were planning to take a year off anyway, this is the year to hang up your hat for awhile. And if you have some capital gains to take, do it earlier, say in your child's sophomore year. Another great way to cut your expected share of college costs is to have a business of your own. If you need any extra motivation to create your Ace in the Hole, here it is! Ideally, you want something up and running in your child's junior year. (The IRS has a bad habit of assuming businesses that aren't profitable in at least three out of the last five years, aren't businesses at allbut hobbies.) A small business can provide tax benefits and can cut your college costs because business assets are assessed at a lower rate than personal assets. By and large, the schools don't care how deep in debt you are. You'll be expected to contribute as if you weren't. Another good reason to pay off those bills! Say you need to buy a new(er) car. You'd decrease your assets by spending money in your savings account for it, and therefore, your EFC would go down. Interestingly, if you borrow from a bank or a car dealer to buy the car, in addition to finance charges, you'd have to come up with more money to pay for collegebecause you haven't reduced your assets. A better bet might be to borrow against your home equity (if your child is applying to schools that count it, which many private colleges do), or to borrow against your investments (e.g., a margin loan against stocks). While auto loans are not deducted from your assets, loans against your home and investments are. The possible mix of grants, loans, and work/study opportunities will vary from school to school, state to state, or public to private institution. But with the major exception of those private schools whose calculations include home equity, your family's up-front cash contribution will (at least in theory) be the same, whether your child goes to Princeton or Podunk U. The biggest difference in final costs will result from the fact that loans need to be repaid, while grants do not. If you are not able, interested, or willing to become very well informed, an early meeting with a qualified specialist in financial aid rules may save you a fortune. Tax preparation and college aid applications are very different. A tactic for saving money on one may cost you money on the other. Be aware, though, that while most planners are up to speed on topics like retirement planning, experts in college financing are tougher to find. So how do you find such a specialist? Ask guidance counselors, other parents, and friends for recommendations. The International Association for Financial Planning (800-945-IAFP) can refer you to any of their members in your area who specialize in college financial planning. Dee Lee, a Certified Financial Planner with Harvard Financial Educators in Harvard, Massachusetts, says that a good planner should be up front about his or her expertise. If the person you contact has only a smattering of college finance experience, ask for a referral to a colleague who specializes in the area. (See page 309 for information on finding a general financial planner.) Once you find your way to an advisor, ask to talk to several clients he or she has helped through the intricacies of college money. Philip Johnson, a Certified Financial Planner in Clifton Park, New York, who specializes in college financial planning, advises parents to trust their instincts in choosing an advisor. How long have they been advising? Who are some previous clients you can speak with? What are the credentials they bring to the table? You know the drill! If you're immediately presented with an investment vehicle that's designed to hide assets, watch out. You want to feel comfortable with an advisor, and have the sense that you're getting recommendations based on your particular situationnot a canned solution that's ethically dubious.
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