Paying Less for College: Funding the Tab

Clear View Wealth Advisors, LLC.TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR

Money Coach Road Map SeriesPaying Less for College: Funding the Tab

Effective Strategies That Protect A Retirement Nest Egg

Presented to Merrimack Valley Estate Planning Council

September 6, 2011


CONGRATULATIONS!

Your clients have at least one student going to college.

They obviously have:

a.) Smart Kids

b.) Motivated Them

c.) A Willingness to Invest in their kids

d.) A Success Problem

Money Coach Road Map Series

Paying Less for College

Presented by Steve Stanganelli, CFP®

aka Spencer’s Dad

They Grow Up Fast!


3M H.S. Grads/Yr

2M H.S. Grads/Yr Apply for College

The Competition

The Applicant Pool

Boston College

1998 16k Applicants

$27k/Yr

Boston College

2009 31k Applicants

$54k/yr

Dartmouth 1998 10k Applicants

$29k/Yr

Dartmouth 2009 30k Applicants

$52k/Yr


The Selection Process

Applicant Profile for Top Rank Schools & Ivies:

• Top 5% (about 100k applicants)

• GPA: 3.7+

• SAT: 720+

• Reading Scores: 56% > 700

• Math Scores: 57% > 700

Process Looks More Selective Because of Expanding Applicant Pool

TIP: Look at Colleges Where Credentials Rank the Student in Top Quartile for That School


Clear View Wealth Advisors, LLC.

There are two very different prices for college — one for the informed “buyer” and one for

the uninformed “buyer.”

Which price will your client pay?


Top PARENT CONCERNS in order of importance

1. Fear parent death before children are grown

2. Saving for retirement

3. Job security

4. Saving and paying for college

College Costs Keep Going UP!!

Increasing 2-3x rate of inflation

2010 Annual Average Costs:*

1. Public University - $16,000

2. Private College - $37,000

*College Board – Trends in College Pricing 2010

Current Problem


Parent Concerns

What Concerns Parents About College

• When to begin planning

• What needs to be done

• Finding a “good fit”

• Paying for college without going broke

• Increasing difficulty of gaining admission to better schools even for well-qualified students


College – Still Worth It?


NEW YORK TIMES (5/18/2011)

“Median starting salary for students graduating

from four-year colleges in 2009 and 2010 was $27,000, down from

$30,000 for those who entered the work force in

2006 to 2008.”



Funding the College Tab

2007 2008 2009 2010 20110

5

10

15

20

25

30

Parents %

Parents %

Percentage of Projected Costs Typical Family On Track to Cover

Source: Fidelity & Investment News, 8/29/11


Concept 1:

College is a retirement problem:

Every dollar going toward college can’t go toward retirement

Parents are entitled to a life after college


Concept 2:

Saving ON College is Different than Saving FOR College


Two VERY EMOTIONAL NEEDS competing for the same limited resources

Will parents be able to accomplish BOTH?

The College Funding /Retirement Savings Dilemma


Avoid “Sticker Price Shopping”

Integrate College Search with Financial Strategy

Find a School That Matches Interests & Abilities

Don’t Obsess Over Brand Name Schools

Plan to Optimize the EFC

College planning -- there is no one size fits all solution.

Secrets to reducing the high cost of college


Sticker Price Shopping –

Don’t Be Deceived

College A College B College C

Cost of Attendance $20,000 $30,000 $40,000

EFC from FAFSA ($10,000) ($10,000) ($10,000)

NEED $10,000 $20,000 $30,000

Avg % of Need Met 60% 70% 80%

Estimated Award $6,000 $14,000 $24,000

Estimated GAP $4,000 $6,000 $6,000

Potential Net Cost $14,000 $16,000 $16,000

Estimates do not reflect any specific college statistics


College Total Cost of Attendance (in-state)

% of Students paying full price

Avg. Net Price

Avg. Net Price

Marquette $39,600 22% $24,900 $29,700

Middlebury $52,500 52% $21,700 $36,200

Princeton $49,800 43% $16,510 $24,600

U of GA $16,800 25% $10,600 $10,900

U of TX $21,900 51% $20,200 $21,000

The Real Cost of a Degree

Avg. Net Price for households with income between $75k and $110k and receiving federal aid

Source: MONEY, Sept 2011, page 120; Department of Education 2008-09 academic year


EFC = $15,000

Formula:

Financial Need = Cost of Attendance - EFC

College Cost of Attendance EFC Financial Need

1. James Madison $21,000* $15,000 $3,988

2. Georgetown $54,000* $15,000 $38,880

*Source – College Board 2011

For financial aid candidates:

Your EFC is the primary determinant for your out-of-pocket college costs, NOT the cost of the college!

Don’t eliminate consideration of schools with higher “sticker prices!”

Example of financial aid eligibility


Financial Aid Formulas are INCOME Driven and Not Asset Driven

Understanding Financial Aid

It’s Key To Understand the Financial Aid Strength & History of Each School

Parent IncomeMax Assessment = 47%AFTER ALLOWANCES(between 22% - 47%)

Student IncomeFM Assesses: 50% after first $5250IM Assesses: $1550 min, then 50%

Parent AssetsMax Assessment: 5.64% AFTER ALLOWANCES

Student AssetsFM Assesses: 20%IM Assesses: 25%

Parent Contribution + Student Contribution = Expected Family Contribution (EFC)


Understanding Financial Aid – Basics

Federal Methodology (FM) Institutional Methodology (IM)

Uses FAFSA Uses FAFSA & CSS Profile

Student Assets Assessed @ 20% Student Assets Assessed @ 25%

Student Income Assessed @ 50% with $5,250 Allowance

Student Income Assessed @ 50% with No Allowance

Parent Assets Assessed at 5.6% with Exemption Allowance Depending on Age

Parent Assets Assessed at 5% with Lower Exemption Allowance Based on Family Size

Parent Income Assessed Between 22% to 47%

Parent Income Assessed Between 22% and 47%

Does NOT Assess Family-Owned Farms or Businesses with < 100 FT Employees

Assesses Farm and Business Equity

Does NOT Assess Home Equity DOES Assess Home Equity


Leverage other strategies

Leverage financial aid enhancing strategies

EFC FAFSA / PROFILE

Foundation for effective college planning


Saving ON the cost of college

Cost-Cutting Strategies for Every Family Regardless of Financial Need Status

Some Examples: - • Take Tests for College Credit

• Advanced Placement (AP) Tests • College Level Examination Program (CLEP)• Proprietary Self-Study Option: DSST • International Baccalaureate (IB)

• Go to a Local State School for A Degree or Transfer Credits• Pursue a Degree at a Lower-Cost School Abroad • Pursue Private Scholarships like Kiwanis or Rotary• Pursue Merit Scholarships (see www.Petersons,com)

• NOTE: Private schools offer more than public (Ivies do not offer)

http://www.petersons,com/


Saving ON the cost of college

“Tax Scholarships”

Structuring Your Income, Business and Tax Filings to Maximize Tax Savings

Money Saved on Taxes Worth More Than Financial Aid

Examples:

Implementing Employer-Provided Education Benefits

Gifting Appreciated Investments

Gifting Depreciated Business Assets

Refinancing and Using Proceeds for Immediate Annuity


Sources for:

• Estimating EFC before hand. How much will you be expected to pay?

a. Finaid.org

b. CollegeBoard.org

Helpful Resources

• Strategies for increasing financial aid eligibility

a. Book: “Paying for College Without Going Broke”

b. Website: Finaid.org

• Resources for Finding Scholarships

a. Websites: FastWeb.com, CollegeBoard.com, Petersons.com, ScholarshipCoach.com, ScholarshipExperts.com, CollegeCashPros.com


Cheap

Options

• School merit-based scholarships• School need-based financial aid• Grants - Pell

• College Savings• Other loans: Private/PLUS/Home Equity• Third party – grandparents, relatives

• Subsidized loans – Stafford, Perkins

Source

Free

Gap

Planning for financial aid

Strategies that increase financial aid eligibility will

reduce out-of-pocket college costs, the gap and need for

debt financing


Late-Stage Planning for Higher Income Clients

Clients May Consider the Following:

Take Hope & Lifetime Learning Credits

Use Another Family Member’s Lower Tax Bracket

Employ Their Children

Establish an Educational Assistance Plan Through Client’s Business

Use Smarter Borrowing Techniques


What NOT TO DO: The less you know, the more you pay

Fact: Gifting money to financial aid candidate will reduce financial aid eligibility

Result: Cost the family $$$ in financial aid lost!

Example: Grandparents gift $10,000 to grandchild for college, may cost the family as much as $7,000 in financial aid!

Lack of knowledge results in lost financial aid

Strategy: Wait until after college to gift – help pay off student loans. No lost financial aid.


Knowing WHAT TO DO – the more you know, the less you pay

Facts: Family income of $57,000. Assessable assets of $200,000

Strategy - Reduce AGI below $50,000 by contributing to retirement accounts

Result - Family qualifies for “Simplified EFC.”* Assets of $200,000 are not included in financial aid formula and family qualifies for significantly more financial aid. * Note: Assumes filing a 1040EZ or 1040A

May save parents $$ over four years!

What will savings on college costs AND increased retirement account contributions mean for retirement income and quality of life?


Knowing WHAT TO DO – the more you know, the less you pay

Strategies for Increasing Need-Based Aid:

Controlling or Changing the Position of Assets

Some Examples: -

• Don’t Hold Assets in Your Child’s Name

• Maximize Non-Assessable Assets: IRAs, SEP IRAs, Roth IRAs, 403bs,

401ks, Annuities, Cash Value Life Insurance

• Don’t Overestimate the Value or Your Home, Other Real Estate or Business

• Restructure Your Debts (Ex. Refinance Credit Cards to Lower Home Equity)

• Pay Off Debts or Make Needed Purchases = Show Less Cash


Options

• School merit-based scholarships

• Savings strategies

• Cash flow strategies

• Income and asset planning strategies

• Strategies for business owners

• Strategies for grandparents

• Tax credit strategies

• Gifting strategies

• Loan strategies

Source

Free

Gap

Planning for high income late starters

The cumulative effect of implementing and coordinating

the right strategies can be significant savings on out-of-

pocket college costs


Facts: Parents income too high to qualify for education tax credit. Limited benefit from personal exemption. Plan to liquidate appreciated assets to pay for college OR “write a check.”

Effect: Parents will pay capital gains (can increase real cost of college), no benefit from tax credit. If paid with after tax income, the real cost of college is twice the “sticker price”.

Better Strategy: Gift appreciated assets to child to help pay college costs. Child fulfills requirement for tax independence during college years and qualifies for education credits. Child pays NO tax due to deductions

Better Results: • Parents maintain control of asset until senior year of H.S.

• Increased cash flow – don’t use after-tax income

• Student qualifies for education tax credit

• Tax savings

• Parents – on capital gains = $$$

• Student - education tax credits – as much as $2,500/year based on 2010 maximum credit.

Example


Case Study: Late-Stage/High Income

Student: Jay , entering high school, not a candidate for need-based aid

College: Colby

Cost of Attendance: $54,000 (1 year); $244,400 (4 years)

EFC: $54,000

Parents: Own Contracting Business and Rental Properties with Fully Depreciated Assets

Tax Bracket: 33% combined Federal & State

BASE YEAR INCOME (AGI): > $135,000

______________________________________________________________

POSSIBLE SOLUTIONS:

Family Limited Partnership

Gift of Business Assets with Leaseback

Crummy Trust to Shift Income/Maintain Control

Employer-Sponsored Education Assistance Program


Savings from Tax Strategies: $12,508

• $11,147 (Federal – one year)

• $1,361 (State – one year)

Lower Owner’s Draw and Shifted Income to Cover Hiring Son – Save $1500 in Income Taxes

Implement EAP – Save $1400 in Income Taxes

ROTH IRA for Son’s Earnings

Gift $52,000 of Business Equipment to 4 Children and Pay Rental Rate – Save $1700 in Income Taxes

INCOME STRATEGIES


Cash Flow Strategies

BORROW SMART with a PLAN

Refinance Home and Use Proceeds to Fund Immediate Annuity

• Increases Interest Deduction (possible tax savings of $3,000)

• Annuity Payments Guaranteed and Fixed

• May Improve Cash Flow

• Negligible Tax & Financial Aid Implications

Increased Cash Flow During College $26,686

PLUS Loans $236,000

PLUS Pymts (13 Yrs @ 7.9%) $342,661

Immediate Annuity Pymt (10 Yrs) $263,600

Total Shortfall Using Annuity to Offset $79,076

Tax Savings Due to Refi $34,118


Goals:

1. Return exceeds college inflation

2. Tax-deferred growth

3. Tax-favored access for college

4. Favorable for financial aid

5. Can be used for college AND retirement

6. Tax-favored access for retirement

Consider savings and funding vehicles that meet the following objectives.

1. Funds for college

2. Savings for retirement

3. Minimal impact on monthly cash-flow

4. Appropriate for college AND retirement - flexibility

Savings and Funding Strategies


Wow, So many options, but which is the

right one for my family?

Stocks

CESAEE Bonds

529

Comparison of Options – how do they rate?

Option Pros Cons

Roth IRA Accessed Penalty Free

Earnings May Be Counted as Income for EFC

529 College Savings Plan

Growth Tax-Deferred & Withdrawals Tax Free

Assessable Asset for Financial Aid

CollegeSure CDs

Low Risk / FDIC Insured

Assessable Asset for Financial Aid

UTMA / UGMA Taxed at Child’s Rate for first $1800 generated

Subject to “Kiddie Tax” if account generates > $1800/year

Retirement Plan at Work

Tax-deferred / Loan possible

Distributions fully taxable


Achieving the best outcome

College financial planning – newborn through senior year in high school

Timeline

College admissions and financial aid process Begins junior year in high school and extends throughout college years

College Planning

l l l l l l l l l l l l l l l l l l l l l l

Tactical Planning

0 1 2 … 17 18Age of child

Help you work toward a best outcome

1. Lowest out-of-pocket costs for family

2. Best college fit for student

3. Combine longer-term strategic planning with nearer term tactical moves

BEST COLLEGE at the RIGHT PRICE … without you going broke or busting your retirement nest egg


The KEY CONCEPTS Cheat Sheet:

• Define “Financial Need”

• Calculate EFC

• Optimize the EFC

• Proper Planning Leads to “Tax Scholarships”

• Employ Cost-Cutting Alternatives

The Money Factor: Takeaways


Clear View Wealth Advisors, LLC TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR

Clear View Wealth Advisors, LLC, A registered investment advisor.

Informed or Uninformed :

Your Clients Have a Choice

__

Which type of buyer of a college education will your

client choose to be?


ABC Company TO BE USED SOLELY IN CONJUNCTION WITH THE PROFESSIONAL ADVICE AND COUNSEL OF A QUALIFIED FINANCIAL ADVISOR

Securities and advisory services offered through LPL Financial, A registered investment advisor. Member FINRA/SIPC

Informed or Uninformed – Which

buyer of a college education will you

choose to be?

Uninformed buyer!

Economy & Finance

Paying Less for College: Funding the Tab