College Finances 101: Introduction to college funding and financial aid is now available for review.  This recording was made on the evening of December 8th, 2009 and covers the following:

• The college funding environment
• The college financial aid system
• Expected Family Contribution (EFC)
• FAFSA
• CSS Profile
• Financial Aid Priority Deadlines
• College Financial Track Records
• College Application Strategies
• College Financing
• Strategies and Tactics to Minimize College Costs and Increase College Financial Offers
• Negotiating the College Financial Award

This overview runs about 71 minutes. After you have finished watching, click the link below the video to request a PDF of the presentation be emailed to you.

Should you have any problems viewing the video, you may need to update your computer’s flash player.  You can do that at the Adobe website.

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Are painful changes just around the corner for 529 prepaid college tuition programs?  If you live in Texas, they are not around the corner; they are staring you in the face and kicking you in the gut!

In a very surprising move last month, Texas Tomorrow Fund officials announced that their prepaid 529 fund would no longer return the accumulated interest on withdrawals if the money was not spent in Texas.  Some 100,000 families are now stuck with nothing more than a zero interest loan to the state if their students decide they would rather not go to college in Texas.

Why is this happening?  Simply put… legislative mismanagement.  The Texas Tomorrow Fund is bleeding at critical levels and will be over 1.7 billion dollars in the hole by 2030.  This is an excellent example of how what legislators thought was  a good idea is now blowing up in their faces.

Families have until November 30th to withdrawal the balances in their funds.  After that point, they will only get back the principal they paid in, minus administrative fees.  What a bargain.

Of course if you pull the money out by the end of this month and do not have allowable college expenses to spend it on, you will get penalized as well.  A real case of the state getting you coming and going.

Be very careful of relying upon any college savings plan that is beholden to government officials.  As we see in the example of Texas, their mismanagement or whim of change can cost you money.  Education Savings Accounts (Education IRA’s) are probably safer, but a sound savings plan will include several instruments.

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So college and retirement have come at the same time.  Is there a best course of action?

As families have decided to have children later and later, it is not uncommon for college to come right at the time that many parents decide to retire.  This will have an impact on how you will want to pay for college.

First off, it is important to remember that the money you have in your retirement accounts (ie. 401k, IRA, Roths, SEP’s, etc.) will not count towards your FAFSA expected family contribution (EFC).  It probably will count towards the Profie EFC, but this is not any different than for those who are 20 years from retirement.  So it is wise to keep your funds in your retirement accounts as long as possible.

However, any distributions you take from your retirement accounts will be considered as income for your FAFSA and Profile EFC calculations.  Even if that distribution is coming from a Roth IRA and is non-taxable, it will still be considered as income for financial aid purposes.  Again this is a good reason to keep money in your retirement accounts as long as possible.

So are there any benefits that retirees have when sending children to college?  Let me propose the following and you decide.

Typically, personal expenses go down during retirement.  You no longer have to make social security contributions.  You don’t have to make any more retirement contributions.  For you and your wife, you should be able to maintain your standard of living on 75% to 85% of your previous full-time income.  This can be beneficial because income is counted as high as 50% towards your EFC.

However, you still have to pay for your student’s college, or at least contribute to it.  How do you cover that additional expense?  My recommendation… borrow it.  Whether it be through student loans or home equity, borrowing the money will save you more in the long run.  Remember, if you withdraw the money from your retirement account, you will be assessed as high as 50%.  But if you borrow the money, even at a lousy interest rate, the most you would reasonably expect to pay would be 11%.  Once your student gets past the time when your income is being assessed, typically when filing the last FAFSA during their junior year in college, you can withdraw that money from your retirement accounts that you planned on spending on your student’s college and pay down those loans.

I highly recommend you do a thorough EFC analysis before making any decisions.  The impact of the strategy outlined above will vary greatly depending upon your unique financial position.

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A friend of mine emailed me yesterday wanting my opinion on whether or not it would be a good idea for her daughter to accept additional Stafford loans for her graduate degree, or would it make more sense for them to take out a home equity loan.

Graduate degrees can get very expensive… quickly.  And because students are typically considered independent when pursuing such a degree, the Stafford loans they are offered can be very large.

The student will be starting on her pharmacy degree next fall to the tune of $50,000 per year.  She was offered $8,500 in subsidized Stafford loans, and $24,500 in unsubsidized Stafford loans.  Those numbers are huge, but considering that the median starting salary for a pharmacist is $81,000; many would agree it is worth the investment.  But is it worth the Stafford loans?

My recommendation… take the subsidized Stafford, but don’t take the unsubsidized.  Subsidized Staffords are no interest, no payments while in school.  They are free money at least until you graduate and always make good sense.  However the unsubsidized Stafford, while no payments are due during school, does accumulate interest while in school.  Here’s the problem… the tax deduction on education loan interest is completely phased out by $70,000 in income.  The median income for a pharmacist is $81,000, so she will likely never get the opportunity to deduct any of that interest.

Some form of home equity financing would make much more sense in this case to cover the unsubsidized Stafford which was offered.  The interest on home equity financing would be deductible.

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There has been a significant change in the qualifying college expenses for 529’s.  Computers and eduction related software are now considered allowable expenses for 529 funds.  Previously, only that equipment that was specifically required by the college for the program of study was an allowable expense.

Not only is the computer an allowable expense, but it doesn’t even have to be the student’s computer.  It just has to be a computer that the student uses.  This could be your home computer sitting in your den.

Here is the new rules as it is written…

(iii) expenses paid or incurred in 2009 or 2010 for the purchase of any
computer technology or equipment (as defined in section
170(e)(6)(F)(i)) or Internet access and related services, if such
technology, equipment, or services are to be used by the beneficiary
and the beneficiary’s family during any of the years the beneficiary is
enrolled at an eligible educational institution.

Clause (iii) shall not include expenses for computer software designed
for sports, games, or hobbies unless the software is predominantly
educational in nature.

This amendment to Code section 529(e)(3)(A) only applies to expenses
paid or incurred after Dec. 31, 2008. Therefore, an account owner may
not take reimbursement out of a 529 account for a computer purchased
and paid for before Jan. 1, 2009.

The changes are part of the new administration’s economic stimulus plan.  This part is designed to hopefully give the computer industry a shot in the arm.  Also notice that currently this only applies to the 2009 and 2010 calendar years.  At this time, only the 529 is included in this definition, not Coverdell ESAs nor education distributions from IRAs.  However, I don’t doubt that will be changed soon.

This is good news!  Go buy a new computer and use the 529 to do it.

Here is a link to a Morningstar article by Susan Bart if you would like to read more about this.

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