Is Need-Based Financial Aid Affected by a Grandparent-Owned 529 College Savings Plan?

It is no surprise that the cost of college is growing. Year after year, the tuition rates rise along with the amount of student loan debt that students take on. According to an article in USA Today, the average cost of college over the past decade has risen to $34,740 a year, which is up $7,000. Unfortunately, as the cost continues to rise, families are relying on more than just their parents to help pay for it – now, they are looking to grandparents as well.

A 529 College Savings Plan is a great option as it allows you to save money for your child or grandchild’s tuition free from tax when the money is used on qualifying educational expenses. Many parents and grandparents have already jumped on the 529 train, but the problem is, grandparents worry that their 529 contributions are going to negatively affect the student’s need-based financial aid.

The FAFSA or Free Application for Federal Student Aid looks at the income and assets of all parents for students who are considered dependent. When it comes time to fill out the application, a grandparent’s 529 plan and contributions are not looked at or asked for on the FAFSA.

However, the impact a 529 college savings plan can have can be significant depending on who owns it. Here is how a 529 can impact your need-based financial aid:

  • If a student is considered a dependent, the 529 plan is listed as an asset of the parent on the FAFSA. Distributions from the 529 plan are not counted

  • If a student is considered independent, the 529 plan is listed as an asset of the student on the FAFSA. Distributions from the 529 plan are not counted

  • If anyone else owns the 529 plan such as a grandparent, the 529 is NOT listed on the FAFSA, however, distributions from the 529 are counted as income of the student

So, what does this mean for need-based financial aid? Let’s look.

  • If the student is a dependent and the 529 is listed as a parent asset, the need-based financial aid may be reduced by up to 5.64% of the asset value

  • If the student is independent and the 529 is listed as their own asset, the need-based financial aid may be reduced by up to 20% of the asset value

  • If the distributions come from a 529 owned by someone else, the need-based financial ad may be reduced by up to 50% of the amount of the distribution

Ways to Work Around a Grandparent-Owned 529 Plan

Fortunately, there are some workarounds that allow you to avoid the negative impacts that a grandparent-owned 529 college savings plan can have on a student’s need-based financial aid.

1.    Change the account owner. One of the first ways to work around the negative impact is to have the grandparent sign over the account to the parent, if the 529 allows this. This will help reduce the amount of impact the 529 has on the student and their aid.

2.    Take the distribution later. Since the FAFSA uses tax information from two years ago, so the family can wait to take out a distribution until later. For example, if the student is looking for a two-year degree, the family can take the distribution on January 1st in the sophomore year as there would be no previous year distribution to be considered to reduce the student’s aid.

3.    Rollover the funds in the 529. Grandparents can roll over up to a year’s worth of funds into a parent-owned 529. The rollover would occur after the FAFSA has already been filed and the rate at which the student’s need-based financial aid is reduced is much less.

While a grandparent-owned 529 is a great way to save money for their grandchild’s future tuition, it can have some negative affects on the student’s financial aid eligibility when distributions are made. Grandparents, parents, and students should sit down and discuss all options and how these options can affect financial aid. If a grandparent wants to save for college but they do not have a 529 in their name yet, considering having them open it up in the parent’s name and making the contributions directly to that account.

Should you need any help making a decision about a grandparent-owned 529 college savings plan, do not hesitate to contact me, Monica Felton, at 480-210-4414.

Financial Games Colleges Play

college games.png

About this time, colleges are sending out two types of letters. The good letter is the acceptance letter and weeks later, the bad letter telling students how much it will cost.  Unfortunately, the bad letter, the financial award letters, are hard to read, leaving out vital information often deceiving families about the financial award and cost of college. 

Award letters are not standardized.  Each college has their own format with terminology and jargon specific to their school.  Because of this, families are left to compare award letters and they're not doing an “apples to apples” comparison. 

Some letters do not tell the total cost of college or what your actual out of pocket costs are going to be.

 Northern Arizona University sent a student an award letter that said the total financial aid offer was $30,890.  This is actually the cost to attend NAU but the problem was $25,075 of the aid came in loans.  This is deceptive!  It’s like buying a car for $25,000 and because they gave you a loan, the car was free!

At Temple University, a student received a financial award letter saying they were pleased to offer a combination of grants and loans totaling $25,909 for the freshman year. Unfortunately, the letter failed to mention that Temple costs $33,048 a year to attend. That was the total cost of college and included tuition, room, board, and living expenses. This student could easily have shown up for school only to find out that they had a $7000 shortfall.

Selecting a college is one of the biggest financial decisions a family can make. It's also turning out to be one of the most complicated. Understanding exactly what you're going to pay for college includes the following:

  1. What is the true cost of attendance? The true cost of attendance includes tuition, books, and room and board, incidentals, and travel expenses.
  2. Is your financial award a gift or a loan?
    • A gift will look like tuition reduction or a scholarship.  A gift is money you don't have to pay back.
    • Loans must be paid back.  There are several types of loans that families can be offered. There are student loans and there are parent loans.   What are the interest rates?
  3. Work-study might also be included as a way to reduce costs of college.

Understanding the true cost of college will ultimately lead you to the best financial decision when selecting your student’s college. 

 

College Cost What? $100,000???

The College Board reports that a moderate college budget for an in-state public college for the 2017–2018 academic year averaged $25,290. A moderate budget at a private college averaged $50,900. But what goes into these costs?

Tuition

Tuition is what colleges charge for the instruction they provide. Colleges charge tuition by the units that make up an academic year, such as a semester or quarter. Tuition at public colleges is often a bargain for state residents, but not for out-of-staters, who often pay double the tuition of residents.

Tuition can vary by major. Students in the sciences, engineering, computing, premed programs, and the fine arts often pay more. For example, at University of Illinois Urbana-Champaign, students enrolled in the College of Engineering pay up to $5,000 more in tuition than students pursuing other majors.

Fees

Colleges charge fees for services. These fees may include the library, campus transportation, student government, and athletic facilities.

Colleges often report a combined tuition and fees figure. According to the College Board, the average cost of tuition and fees for the 2017–2018 school year was $34,740 at private colleges, $9,970 for state residents at public colleges, and $25,620 for out-of-state residents attending public universities.

Housing and Meals

The cost of "room and board" depends on the campus housing and food plans you choose. The College Board reports that the average cost of room and board in 2017–2018 ranged from $10,800 at four-year public schools to $12,210 at private schools. Colleges also provide room and board estimates for living off campus based on typical student costs.

Books and School Supplies

Most colleges estimate the average costs for required learning materials. Some colleges even include the cost of a computer and computer accessories. The College Board reports the average cost for books and supplies for the 2017–2018 school year was $1,250 at public colleges and $1,220 at private colleges.

Personal and Transportation Expenses

Colleges may estimate some expenses they don't bill you for. These include local transportation, clothing, personal items, entertainment, etc. The College Board reports that expenses in this category for 2017–2018 ran from $2,730 at private colleges to $3,270 at public universities.

Don't Give Up on a College Because of Its Sticker Price

The price of college may seem overwhelming, but college educations come at many different price levels, and financial aid can greatly reduce your cost.

 

29 Important things you need to know about the new tax code:

2018 tax bracket.png

 

  1. This is the first significant reform of the U.S. tax code since 1986.

Reagan signed major legislation for corporations and individuals in 1986. Since then, serious tax reform has eluded Republicans, though they repeatedly called for it as the tax code became longer and more arcane.

  1. Changes have been made to both individual and corporate tax rates.

Individual provisions in the new legislation technically expire by the end of 2025, though some people expect that a future Congress won't actually let them lapse. Most of the corporate provisions are permanent.

  1. There are still seven tax brackets for individuals, but the rates have changed.

Americans will continue to be placed in one of seven tax brackets based on their income. But the rates for some of these brackets have been lowered. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Find out where you fit here: https://taxfoundation.org/2018-tax-brackets/.

  1. The standard deduction has essentially been doubled.

Republicans want fewer people to itemize their taxes. To achieve this, they've nearly doubled the standard deduction. For single filers, the standard deduction has increased from $6,350 to $12,000; for married couples filing jointly, it's increased from $12,700 to $24,000.

  1. The personal exemption is gone.

Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents, which lowered your taxable income. No longer. For some families, the elimination of the personal exemption will reduce or negate the tax relief they get from other parts of the reform package.

  1. The state and local tax deduction now has a cap.

The state and local tax deduction, or SALT, remains in place for those who itemize their taxes -- but now there's a $10,000 cap. Previously, filers could deduct an unlimited amount for state and local property taxes, plus income or sales taxes.

  1. The child tax credit has been expanded.

The child tax credit has doubled to $2,000 for children under 17. It's also now available, in full, to more people. The entire credit can be claimed by single parents who make up to $200,000, and married couples who make up to $400,000.

  1. There's a new tax credit for non-child dependents, like elderly parents.

Taxpayers may now claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.

  1. Fewer people will have to deal with the alternative minimum tax.

The alternative minimum tax, a parallel tax system that ensures people who receive a lot of tax breaks still pay some federal income taxes, remains in place for individuals. But fewer people will have to worry about calculating their tax liability under the AMT moving forward. The exemption has been raised to $70,300 for singles, and to $109,400 for married couples.

  1.  And the mortgage interest deduction has been lowered.

Current homeowners are in the clear. But from now on, anyone buying a new home will only be able to deduct the first $750,000 of their mortgage debt. That's down from $1 million. This is likely to affect people looking for homes in more expensive coastal regions.

  1.  None of this will affect your 2017 taxes.

Americans won't need to worry about these changes when they start filing their 2017 tax returns in about a month. The new laws will first be applied to 2018 taxes.

  1.  By the way, you can still deduct student loan interest.

The deduction for student loan interest, which is up to $2,500 per year, is safe.

  1. You can still deduct medical expenses.

The deduction for medical expenses wasn't cut. In fact, it's been expanded for two years. In that time, filers can deduct medical expenses that add up to more than 7.5% of adjusted gross income. In the past, the threshold for most Americans was 10% of adjusted gross income.

  1. The electric car tax credit lives on.

Drivers of plug-in electric vehicles can still claim a credit of up to $7,500. Just as before, the full amount is good only on the first 200,000 electric cars sold by each automaker. GM, Nissan and Tesla are expected to reach that number some time next year.

  1. Home sellers who turn a profit keep their tax break.

Homeowners who sell their house for a gain will still be able to exclude up to $500,000 (or $250,000 for single filers) from capital gains, so long as they're selling their primary home and have lived there for two of the past five years.

  1. 529 savings accounts can be used in new ways.

In the past, funds invested in 529 savings accounts wasn't taxed -- but it could only be used for college expenses. Now, up to $10,000 can be distributed annually to cover the cost of sending a child to a "public, private or religious elementary or secondary school." This change is a win for Education Secretary Betsy DeVos.

  1. And tuition waivers for grad students remain tax-free.

Graduate students still won't have to pay income taxes on the tuition waiver they get from their schools. Such waivers are typically awarded to teaching and research assistants.

  1. But say goodbye to the tax deduction for alimony payments.

Alimony payments, which are codified in divorce agreements and go to the ex-spouse who earns less money, are no longer deductible for the person who writes the checks. This provision will apply to couples who sign divorce or separation paperwork after December 31, 2018.

  1. The deduction for moving expenses is also gone ...

There may be some exceptions for members of the military. But most people will no longer be able to deduct the cost of their U-Haul when they move for work.

  1. 22. As is the tax preparation deduction ...

Before tax reform passed, people could deduct the cost of having their taxes prepared by a professional, or the money they spent on tax prep software. That break has been eliminated.

  1.  The disaster deduction ...

Losses sustained due to a fire, storm, shipwreck or theft that aren't covered by insurance used to be deductible, assuming they exceeded 10% of adjusted gross income. But now through 2025, people can only claim that deduction if they've been affected by an official national disaster. That would make someone whose house was destroyed by a California wildfire potentially eligible for some relief, while disqualifying the victim of a random house fire.

  1.  Almost everyone is now exempt from the estate tax.

Before tax reform, few estates were subject to the estate tax, which applies to the transfer of property after someone dies. Now, even fewer people have to deal with it. The amount of money exempt from the tax -- previously set at $5.49 million for individuals, and at $10.98 million for married couples -- has been doubled.

  1. Adjustments for inflation will be slower.

The new legislation uses "chained CPI" to measure inflation. It's a slower measure than what was used before. Over time, that will raise more money for the federal government, but deductions, credits and exemptions will be worth less.

  1. Oh, and the individual mandate on health insurance has been scrapped.

Republicans failed to repeal Obamacare earlier this year, but they managed to get rid of one of the health law's key provisions with tax reform. The elimination of the individual mandate, which penalizes people who do not have health care, goes into effect in 2019. The Congressional Budget Office has predicted that as a result, 13 million fewer people will have insurance coverage by 2027, and premiums will go up by about 10% most years.

  1.  The corporate tax rate is coming down.

The corporate tax rate has been cut from 35% to 21% starting next year. The alternative minimum tax for corporations has been thrown out altogether. Earnings are expected to go up as a result.

  1.  Pass-through entities will also get a break.

The tax burden by owners, partners and shareholders of S-corporations, LLCs and partnerships -- who pay their share of the business' taxes through their individual tax returns -- has been lowered via a 20% deduction. The legislation includes a rule to ensure owners don't game the system, but tax experts remain concerned about abuse of this provision.

  1. Tax reform will increase deficits by $1.46 trillion over the next decade.

That's the net number that's been crunched by the nonpartisan Joint Committee on Taxation. The future law's contribution to the debt will likely be even higher if individual tax cuts are re-upped in eight years.

 

New Tax Law Changes on Education

education money.png

Finally, both houses passed the new tax bill, which is the first major change to the tax code in 30 years. The new Tax Cut and Job Act will have a significant impact on education funding.  The main objective of the bill is to lower taxes and simplify the process.

Below are the final approved areas that may have a direct impact on college funding and student loan repayment.

 College Funding Items

529 Plans – They can now be used for K-12 education cost up to $10,000 per child.  This could be very helpful for people who live in states that offer a tax deduction for contribution to a 529 plan.  It also includes a provision for use in home schooling.

American Opportunity Credit – This tax credit remains at $2,500 per child per year with qualified college expenses.  There are income limits based on the tax filing status. 

College Tuition Benefit will remain untaxed.  – Initial change was to make it taxable.  It is still considered an outside resource for need based financial aid determination.

Company Tuition Reimbursement will still be tax free up to $5,250.  Initially planned to be eliminated but was added back in.

Coverdell Saving Plans – Initially listed to be eliminated especially after the 529 expansion.  The Coverdell will remain the same.

Graduate School Scholarships – There is no change in the final bill.  This too was listed as a change in the initial bill but will remain the same as current law.

Hope Scholarship and Lifetime Learning Credit – The original bill stated to eliminate both of these income tax credits but they will remain the same.  The goal was to have only one educational tax credit.  This credit helps specific tax filers who were part time students and graduate students.

Student Loan Deduction – This is still an allowable deduction in the final bill.  The original bill eliminated this deduction.  There are limitations based on how you file your taxes.

Student Loan Discharge due to Death and Disability will be tax exempted – Prior to this bill these types of student loans forgiveness were taxable.  This will remain in place but will be sunset in 2025.  Other Income Drive Repayment Loan forgiveness such as IBR, PAYE, REPAY are still taxable forgiveness.  Public Service Loan Forgiveness is tax free.  Changes in these plans will be addressed in the Higher Education Act being reviewed now.

The Elliott Group is here to help you navigate this process and make better decisions.  The Tax Cut and Job Act impact on education is just the first step in the changes ahead.

Making College More Affordable

I had the privilege of speaking for Kaplan as the college financial expert over a webinar.  This webinar will teach you the following:

  • What does college cost
  • What will college cost you specifically
  • How do you get need based financial aid

Early awareness is the key to success.   My expertise is helping families save and pay for college so they don't sacrifice their retirement! I help families all over the country.  Let me know if I can help you!

Why...

So why have I spent the last four blogs talking about entitlements?  I do college planning…why do you care about entitlements?  Because entitlements will impact you financial future!

 Remember, college is one of the biggest hindrances of a successful retirement.   Families don’t properly prepare for future costs, liabilities, and benefits.  They save too little and spend too much.   Awareness is power.  The more you understand today what retirement will look like, the better you can prepare, save, and spend today.  You will make better financial decisions!  

 I always ask my families if they think the government is stupid.  Does the government (and you) understand that we have financial tools that allow you to pay your taxes now, when they are historically low, and transfer money to the future, INCOME TAX FREE, when taxes will obviously be much higher?

How long do you think the government will allow us to have products like that? Isn’t it also true that only people who have those products, before the government changes them, will be the only ones allowed to keep them? Won’t the government be acting on this soon? Shouldn’t you beat them to the punch while you still can?

 I inspire families to take action today!  I help them use their own common sense to reason out what is the best course of action to have successful financial futures and successful retirements.

 

Lets talk about Medicaid

medicaid expansion.png

Medicaid is a joint funded health care program, federal and state, for low-income and needy people.  There are currently 77 million beneficiaries on Medicaid out of the 323.1 million people. 24% of America is on Medicaid.  That is one out of every four people in our country.  

 Obama Care or the Affordable Care Act is a huge reason for this large number.    Obama Care just pushed tens of thousands of people onto Medicaid and because the Senate was unable to repeal Obama Care, a program facing huge difficulty, it will face even more challenges. It is almost certain that President Trump will take two actions which will surely cause the demise of Obama Care. 

 It is highly likely he will direct the Internal Revenue Service to not enforce the rule requiring everyone to have health insurance. If people don’t have to buy insurance, more and more will chose not to. That means sick people and the old people will become a larger portion of the insurance pool and that will almost surely drive rates up… exorbitantly.  

 Our president will also stop paying extra money to the insurance companies under Obama Care.  This portion of the bill was not passed in the house and Republicans claim that paying the insurance companies was illegal anyway. Courts have agreed with them. The Solicitor General, who is appointed by President Trump, will agree with both the President and the courts and nullify the provision.

 When those subsidies to the insurance companies end, every insurance company in America will pull out of Obama Care leaving nobody to write insurance.  Americans will really have no good choices.   Americans will see their premiums rise dramatically and there won’t be any companies willing to write new insurance. THIS WILL BE AN ENORMOUS MESS!

 Understanding this today should motivate families to plan and prepare today for the future, or uncertain future of health care.  Once thing I can promise, health care will be a significant future liability for families.  How you’re going to pay for it should be part of your future planning.   

 

Let’s talk about Medicare

medicare.png

Medicare is a federal health insurance program for people who are 65 or older and certain younger people with disabilities.  Today, there are 57 million beneficiaries. 18% or almost one out of every five people in our country is on Medicare. By 2030 those will be at last 80 million people on Medicare or close to one out of every four Americans. Pretty soon the whole country will look like Florida!   Please remember that 70% of the Baby Boomers retire between 2022 and 2029.

The unfunded liability for Social Security is around $15 trillion. The unfunded liability for Medicare is around $100 trillion. Medicare is predicted to go bankrupt in 2029. If we have an economic downturn that date could move up to less than a decade from now. 

This problem of Medicare is amplified by life expectancy. When Medicare was enacted in 1965, the actuarial life expectancy of an American was 70 years old. For men reaching age 65, that life expectancy is now age 86 and for women reaching age 65 their life expectancy is age 88. The program was not designed for people to live that long. The entitlement of having access to quality health care for Americans over age 65 has created an economic disaster that no one in government seems to want to take on.

 Current statistics estimate that current retirees will face $400,000 to $600,000 in healthcare cost during their retirements. That will essentially consume all of their social security checks to pay for healthcare costs.   If 100% of your social security check is used for health care, what will people use for food, clothing and shelter? 

 As of today, only 10% of Americans have over $110,000 in assets.  ONLY 10%!  What will the other 90% of Americas do?  Do you think our politicians will let them starve, live on the streets, or deny access to health care?  How will our government pay for this? 

 The amount of money necessary to deal with all these issues is astonishing.   Remember, our government does not make money…they TAX to get money.  When the government needs more money to fund programs like Social Security, Medicare, Medicaid, Obama Care, Homeland Security, Defense, Interest on the debt, natural disasters, ect…will they get the money from the 90% of people who don’t have any money or the 10% that do? 

Planning is the key to success.  Understanding the future of our country should motivate you to take action today to protect your wealth in the future.  The best time to plant a tree was 20 years ago, the next best time is today!

 Today’s lesson – Health care in retirement will eat up an exorbitant amount of retirement assets even with Medicare as a supplement.    And, in Medicare’s current form, it is unsustainable.      

 

Social Security – how secure is it?

This month, the Trustees for Social Security and Medicare just released their annual report.  It was five months late.  The data is dismal.

 Social Security was established by President Franklin D. Roosevelt’s new deal plan in 1935.    It was created to provide a supplemental security income for the elderly or disabled people.  The program is funded through payroll taxes and is predominately a pay as you go program. 

 According to the trustee report, 171 million Americans paid $869 billion on Social Security taxes in 2016. The recipients received $922 billion in benefits or $53 billion more than was collected in taxes. Next year the trustees are reporting that they believe there will be a $60 billion shortfall. 

 Another way to look at social security:  there are less than three people paying for social security for every one person receiving social security benefits. The US Bureau of Labor Statistics says the fastest growing demographic in our country by 2024 will be people over age 65. We will have between 80 million and 100 million recipients by 2030. By 2030 we will have TWO taxpayers paying for every ONE recipient of benefits.

 Do you think this program is sustainable?  How can our government continue to spend more money than it brings in?

 Currently, the unfunded liability for Social Security is around $15 trillion.  Unfunded liabilities are the promises we have already made to Americas.  We need $15 trillion to just support the current recipients of Social Security.  This does not include the 10,000 baby boomers retiring everyday for the next 15 years. 

 The social security problem is further compromised by life expectancy.  In the trustee summary (page 4), the government admits to using age 75 as life expectancy for its social security calculations.  This is a total farce!  Today’s life expectancy statistics are significantly higher. A man that reaches the age of 65 has a life expectancy of age 86 and a women reaching age 65 can expect to life until age 88.  For every year of additional life expectancy, trillions in unfunded liabilities are added to the total.

 For the summary or full report, please Google “Social Security and Medicare Trustees Report 2017”. The top entry will be the Trustees Report Summary. That’s what you want. It summarizes the full 269 page report and does so in 25 pages. This is official as it comes right from the government and the trustees for those two programs.

 Early education is the key to financial success.  My goal is motivate you into action.  Now is the time to plan your financial future so you will be in-control of your financial future, not the government!

 Today’s lesson – Social Security is unsustainable in its current form.  This will not be the government program that gets you through retirement.