We’ve just begun the new year, but the next academic year is still months away. Nonetheless, if you have a child who will be attending college in the fall, it’s not too soon to start thinking about what might be a vital component of paying for his or her higher education: financial aid.
Specifically, to help ensure that your child doesn’t miss out on federal and state student grants, work-study and loans for the 2015-2016 school year, you’ll want to complete the Free Application for Federal Student Aid (FAFSA) as soon as possible. (You can start the application process by visiting http://www.fafsa.ed.gov/.)
Even if you have a fair amount of financial assets, you should probably fill out a FAFSA. In the first place, all parents receive an “asset protection allowance,” based on the age of the older parent. For two-parent families, this allowance generally shelters between $25,000 and $50,000 in assets from FAFSA considerations; for single parents, the range is typically between $6,000 and $10,000. The allowance may be higher for parents 65 and older. Furthermore, in determining your expected family contribution, FAFSA won’t look at your pension plan, your IRA or your 401(k) or similar employer-sponsored retirement account.
Those of your assets held outside retirement plans — the balances in your checking and savings accounts, CDs, investment real estate, stocks, bonds, mutual funds, and so on — will be counted in the FAFSA calculations, but as a parent, you will only be expected to contribute up to 5.64 percent of these assets, as opposed to assets held in your child’s name, which are usually assessed at 20 percent.
You may want to pay special attention to one particular asset — the 529 plan. A 529 plan is a popular college savings vehicle, and for a pretty good reason: The investment dollars you place in a 529 plan can grow tax-deferred, and withdrawals are free of federal and state taxes, provided the money is only used for higher education expenses. (The earnings portion of withdrawals used for other purposes may be fully taxable, and might incur a 10% penalty, as well.) Plus, your 529 plan contributions may be deductible on your state taxes. Like your other non-retirement assets, a 529 plan will be assessed at up to 5.64 percent for FAFSA purposes. Some families, seeking to totally keep their 529 plan assets out of aid calculations, ask the grandparents to own the account.
This could be a problem, though, because while the grandparents’ 529 plan won’t be reported as an asset on FAFSA, withdrawals from the plan will be treated as untaxed income to the beneficiary (i.e., the grandchild) on the next year’s FAFSA — and that can have a big impact on financial aid, a much bigger impact, in fact, than if the 529 plan was listed as a parental asset.
Consequently, you might want to ask the grandparent to award ownership of the 529 plan to you. However, some state plans don’t allow this change, so the grandparent might have to transfer the money to a different state’s plan before giving up ownership.
In any case, be aware of these issues when you tackle the FAFSA. And don’t delay in filling it out. Colleges have a closing date for accepting financial aid applications — and that’s one deadline you won’t want to miss.
Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway.