Derek DeLorenzo, senior vice president of client relationship management at Ascensus College Savings, which administers 31 different 529 plans in 17 states, says that if grandparents do hold 529 plans, it’s best for their grandchildren to hold off on withdrawing assets until they will no longer be applying for financial aid. This would be in their senior year of college, unless they are applying to graduate school.

As for a Uniform Gifts to Minors Act (UGMA) account, he says, it is considered a parent asset if it is invested in a 529 plan but it is considered the child’s asset if it is invested in stocks and bonds.

Early Planning
Parents of younger children should also tune in. Understanding what goes into the expected family contribution and how schools consider this can help them position their assets and steer their kids toward institutions that may offer more attractive aid. It can also help families to better balance the triple threat of saving for education, a home and retirement.

“You’re not going to get loans or scholarships for retirement,” says Beth Walker, a financial planner with the Wealth Consulting Group, a Las Vegas-headquartered RIA firm, and founder of College Funding Coaches, a Colorado Springs, Colo.-based firm that assists in all aspects of college planning. “In a perfect world, we’d talk to parents as soon as their kids are born to optimize planning.”

Instead, she says, most families are unaware that the Department of Education determines the dollar amount it thinks they should be shelling out for college.

Walker holds workshops at schools and offers “1,000-foot level” individual consulting sessions with attendees to explain their expected family contribution, their likelihood of qualifying for aid and some strategies they can use. “They may never engage us,” she says, “but after 30 minutes on the phone, they know where they should be starting.”

To help pay for college, one family she spoke with took $100,000 out of their home by refinancing and parked it in a money market fund. “They thought they were doing the right thing,” she says. Instead, the assets, assessed at 5.6%, added $5,600 a year to their EFC and made them ineligible for financial aid. Multiplied by eight (two kids, four years of school each), it’s a $44,800 mistake. “Ouch,” she says.

Meanwhile, she says it might make sense for a wealthy business owner to consider shifting some income to a child in college because students who can demonstrate they provide half their support are permitted to file their own tax return, in a lower tax bracket than the parent, and may be eligible for tax credits.

Stuart Canzeri, who runs the college planning division at Peachtree Financial Group, an Atlanta-based RIA firm, says it’s critical to understand the expected family contribution before filling out the Fafsa. “Most families come in like an ostrich with their head in the sand,” he says.

Peachtree uses proprietary calculators to show parents of high school sophomores and juniors what their EFC is and what it could potentially be. “It’s not much about financial repositioning,” he says. “It’s about redirecting families to what schools to look at based on their EFC.”

A family with an expected family contribution of $30,000 should not be looking at a $60,000 school if that school doesn’t meet most of that difference with institutional grants, he says. “If anything else, we’ve broken the family for retirement,” he says.

However, he notes, as Kantrowitz discusses in Filing the Fafsa, that a student’s EFC is calculated differently under the federal methodology used by the Fafsa and the institutional methodology used by the CSS/Financial Aid Profile. State schools rely on the federal methodology and private schools may select either, says Canzeri.

He coached one family on how to fight for a private school to use the institutional method, which yielded an EFC of $22,000, instead of the federal method, which calculated it as $33,000. The family was successful and their child ended up going to Dartmouth for $22,000 out-of-pocket, just $1,000 more than the University of Georgia sticker price, he says.

Dartmouth, he notes, had actually calculated a lower EFC using the consensus approach methodology, a set of common standards for determining a family’s ability to pay for college, which is used by Dartmouth and the 22 other members of the 568 Presidents’ Group. The group, an affiliation of colleges and universities that admit students on a need-blind basis, is named after Section 568 of the Improving America’s Schools Act of 1994, which gives member institutions a safe harbor to meet and discuss common principles of financial aid without violating antitrust laws.

Both he and Walker stress the importance of selecting the right college. “It was an aha moment when I realized just how much the student has to do with the total cost of school,” says Walker, noting that more than half of all students take six years to earn a four-year degree.

This spring, the Department of Education is replacing its Federal Student Aid PIN system with passwords to improve security. PINs and passwords serve as electronic signatures and should not be shared, says Kantrowitz—even with financial advisors. “It’s like giving away not only your pen,” he says, “but your entire hand.”

Meanwhile, advisors who help clients file the Fafsa are subject to the same penalties for fraud as the family, he says, including fines of up to $20,000 and five years in jail.

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