Congratulations! You are the proud parents of a healthy new baby! But let me warn you, diaper changes, sleepless nights, feeding and bath schedules should not distract you from planning for your beautiful baby’s future. We all know that life has a funny way of creeping up on us. I could have sworn that my boys were toddlers just a few years ago. Alas, college tuition is now staring my husband and me in the face with a daring question – can you afford me? Moreover, I need to take a crash course in this new programing language called FAFSA.

Now you have me worried – where do I start?

First rule: do not underestimate the value of time. Set up a 529 college savings account early, which offers tax-deferred growth and withdrawals that are exempt from federal taxes when used for qualified education expenses, and start contributing on a monthly basis. As an example, contributing $500/month to a 529 plan earning about 5% (as a hypothetical average annual rate of return)will get you about $169K in total savings over an 18-year period. Is that enough, you ask? Too little or too much? Well . . . it depends on the school your child will attend.

You mentioned FAFSA – what is it and why is it important?

FAFSA is the Free Application for Federal Student Aid, and it carries three deadlines: college, state, and federal. It’s important to check all of them as you prepare to gather information to complete it. Everyone should apply, even if you don’t think you’ll qualify. Many families miss out on financial aid opportunities because they incorrectly assume they won’t qualify. The form is used for state aid, scholarships, and institutional grants. Just do it.

What else should I know about the FAFSA?

Glad you asked. There is the EFC, which is the expected family contribution. This is an index number used to determine your eligibility for federal student financial aid. It considers your family’s taxed and untaxed income, assets, and benefits (i.e., unemployment, Social Security).

Wait, did you say assets impact the expected family contribution? Tell me more.

Yes, all assets other than qualified retirement plans, the family home, small businesses (that have less than 100 full-time equivalent employees), and personal possessions and household goods will impact your EFC, thereby reducing eligibility for need-based financial aid. The impact of an asset depends on whether it is a student asset or a parent asset.

This all sounds complicated. Are there any strategies or best practices?

The good news is that there are some strategies and best practices that you can implement based on your own individualized financial plan. While some of these may or may not fit within your current plan, you should check in with your financial advisor before making any final arrangements.

· Increase contributions to qualified retirement plans as a way to transform reportable assets into non-reportable assets.

· Using reportable assets to pay off non-reportable debt and other obligations (such as credit card and auto loans) will make the reportable asset “disappear” from the perspective of the financial aid formula.

· Accelerate necessary expenses (only if they were already planned) so that the money is spent before the FAFSA is filed (i.e., new car or new roof)

· Shift reportable student assets into a parent’s name. If this is not an option, the family should first spend down the student assets to pay for college before using the parents’ assets.

· Eager grandparents? Fantastic. A grandparent-owned 529 college savings plan can be just what the doctor ordered as these assets aren’t factored into the FAFSA.

Once you’ve exhausted all sources of free aid, college savings, and payment plan options, take a look at the leftover cost. How much do you need to bridge that gap?  

It might be time to check out federal and private loan options. When choosing a federal loan, you will have options between subsidized and unsubsidized. With the former, the government pays the interest accrued on the loan while your child is in school and during deferment (the six months after graduation). These loans are awarded based on financial need as outlined in your FAFSA. At the other end of the spectrum, an unsubsidized loan means your child will have topay all accrued interest.

Paying for college can be stressful and confusing. It’s important to research and get organized so you can make the best decision for you and your college-bound student. Regardless of what you choose to do, don’t forget to fill out a new FAFSA form before every academic year (it opens on October 1).

Disclosures:

 This information is presented for educational purposes only and is not intended to constitute financial, tax, or legal advice. Morton Capital Management dba Morton Wealth (“Morton”) makes no representation that the strategies described are suitable or appropriate for any person. You should consult with your financial, tax and legal advisors to thoroughly review all information and consider all ramifications before implementing any transactions and/or strategies concerning your finances.

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