College Tuition, Student Aid, and the Tax Season

Thursday, March 27, at 12 noon, U.S. Eastern time

Rick Darvis is one of a small but growing number of college financial planners who advise families on how they can plan their financial futures while being mindful of both their tax forms and student-aid eligibility. Mr. Darvis, president and co-founder of the National Institute of Certified College Planners, is a certified public accountant and a certified college-planning specialist who regularly teaches seminars on tax law and college financial-aid policies. He has written and co-authored various books on those topics, including A Roadmap to College & Retirement — Without Going Broke and Paying for College: Tax Strategies and Financial Aid.

A transcript of the chat follows.

Liz Farrell (Moderator):
    Hello, my name is Elizabeth Farrell and I'm a reporter here at The Chronicle who covers financial aid issues. I'd like to welcome all of our guests to this chat on financial aid issues, and especially thank our guest, Rick Darvis, for taking the time to answer all your questions regarding the best ways to plan and save for the formidable costs of a college education.

Question from Will, mid-size proprietary college:
    With the rising cost of tuition, cuts in FFELP subsidies and credit crunch how can students and their families afford to pay for school this year?

Rick Darvis:
    To cope with the paying for college families have to look for help in areas in addition to financial aid. They will have to start looking at maximizing the education tax incentives that Congress has provided, such as the Hope tax credit, and more important, they will have to start looking at strategies to increase their cash flow, such as debt consolidation.

Question from Cyndy Macshane, Laboratory Planner for colleges:
    I have 2 questions; According to FAFSA, we make too much money to qualify for any assistance, however we need to borrow for almost all of my 2 daughter's education (a highschool senior and junior). How much we should borrow is the #1 question. I am 52 years old/ my husband is 50; any borrowing will effect our retirement savings, which is also minimal

#2 Are there loans available that transfer responsibility to the student once they are done and working after a few years? thanks, Cyndy Macshane

Rick Darvis:
    You are right on point...you don't want to let the college tail wag the retirement dog. You will have to weigh putting your child in debt versus putting yourself in debt. Just remember, you can't borrow for retirement and your child has the rest of his life to pay off student loans.

I would suggest putting the loans in the student's name and then you have the option of helping them pay them off or keeping your money for retirement.

I know of no loans where you can shift the responsibility.

Question from srapacz, Chicago City College:
    After using a 529 plan for four semesters at an out-of- plan school and paying cash for two semesters at in-plan school, I wonder if I would be better off taking my money out of the plan. My student starts out as a full timer then drops classes which have already been paid to become a part time student. Now that its a local school, it's very affordable. It doesn't look like a 4-year degree is in the future for this student.

Rick Darvis:
    I would suggest using as much of the 529 Plan funds as possible for college. You can't use 529 funds for things in life without incurring a tax penalty plus paying tax at your higher tax rates.

Question from M. Kerry, State University, South:
    I am a single academic with more than $100,000 in student loans. I paid $4800 in interest last year, but my calculations produce an eligible deduction of only $650. Please advise.

Rick Darvis:
    The deduction for student loan interest is phased out at certain levels of income ($55K to 70K of income is the phase out for 2007). It may be better to use a home loan if available to get a home interest tax deduction.

Question from L. Block, independent educational consultant:
    Can you please clarify how a 529 owned by a grandparent is or is not taken into account on the FAFSA and the Profile.. and therefore how this would affect financial aid eligibility?

Rick Darvis:
    A grandparent owned 529 Plan is not reported as an asset on either the FAFSA or Profile because it is owned by a person other than a parent.

Question from Teresa, large public college nyc:
    1. How much are you allowed to have in savings, TDA's, retirement plans --that are not used to calculate your child's financial aid?

2. What year tax return needs to be submitted?

Rick Darvis:
    Under the Federal Method there is an Asset Protection Allowance that is based on the age of the older parent. For example, if the older parent is age 45 the APA deduction is $43,400. This deduction goes up by about $1,000 for each year older or younger the parent is. On the FAFSA, qualified retirement accounts, such as 401(k)s, IRAs, etc. are not reported.

Question from Teresa Rivera:
    Is there any consideration taken in determining financial aid if the parent is a single parent with a disability?

Rick Darvis:
    On the FAFSA form there is no consideration given to a parent with a disability. However, I would talk to the college's financial aid office about this situation. They may be able to adjust the financial aid package to help you.

Liz Farrell (Moderator):
    To follow up on Rick's answer about the parent with a disability, I would like to add that in my interviews with various financial aid officers, they have repeatedly stressed that they will always consider additional information that is not represented on standardized forms. The most important thing, however, is being able to clearly articulate and document how your disability creates an additional monetary strain. If there are doctor's bills and documentation you can provide that prove your inability to work full time, those are all the more helpful for a financial aid officer to determine how much more aid your family should qualify for.

Question from M. Kerry, State University, South:
    Can art and/or antique maps be deducted if they are used to support research?

Rick Darvis:
    If these are necessary expenses to perform your job duties, they should be deductible. However, consult with your tax professional to be sure.

Question from Maureen, parent:
    Can you explain how they weigh savings in my daughter's (sophomore in high school) vs. my accounts when determining financial need?

Rick Darvis:
    Under the Federal Method formula your daughters savings are assessed at a flat 20% rate. The Institutional Formula that some private colleges use will assess your daughter's savings at a flat 25% rate.

Under the Federal Method your savings will be assessed at a rate that ranges from 2.2% to 5.6%. The Institutional Method will assess your assets at a 3% to 5% rate.

Liz Farrell (Moderator):
    Though the practice is somewhat controversial, some financial planners I have talked to suggest diverting a child's savings into the parent's name prior to applying for financial aid so that they can avoid the significantly larger percentage of expected contribution that is often incurred for savings in a student's name.

Question from Liz Farrell:
    When determining financial need, do colleges give a financial break to families who have another child already in college? And what if they have another child who has already graduated from college, but they are still paying off loans for that education?

Rick Darvis:
    Yes, colleges do give a significant financial aid break to families that have more than one child in college.

There is no consideration given to paying off student loans. However, this situation could be presented to the college financial aid office and they may be able to take it into consideration when they develop a financial aid package for the existing student.

Question from M, Kerry, State University, South:
    What deductions are open to single academics? Educators' deduction? Unreimbursed Research deduction? Etc?

Rick Darvis:
    The $250 educators expense, the education tax credits may be available if you are taking college classes, the living expense and travel to attend summer school, or any job- related expenses, such as computers, software, and supplies used for your job.

Question from Mary, IL:
    Would it be advantageous for families to take out a second mortgage in order to purchase a 529 Prepaid Plan for their children's future college? Would the federal deduction of interest from the 2nd mortgage make this a wise decision?

Rick Darvis:
    I understand your strategy to be that you could borrow at 6% from your home and considering the tax deduction for the interest, your net after-tax interest rate would be 4.5% (assuming you are in the 25% tax bracket). Also, if you thought that you could earn more than 4.5% in a tax-free 529 Plan, this would be a good strategy.

However, there may be two pitfalls to this strategy:

1) The future 529 withdrawals may not be tax-free (See IRS Publication 970 for details)

2) The interest on your home loan may not be deductible since it was used to fund a tax-free investment.

Question from T. Polk, Roosevelt University:
    What are the disadvantages to a grandparent owned 529 plan? And are there any tax implications on the grandparent?

Rick Darvis:
    Disadvantages:

1) They get no tax deduction for a contribution to a 529 like they would to a Charitable Remainder Trust.

2) They have to contribute after-tax dollars.

3) If they die within five years after making the gift to the 529, part of the 529 assets would be included in their estate.

4) 529 Plans have not historically produced a very good rate of return (around 4.2% average over the last 5 years)

5) Potential financial aid loss if the college decides the 529 funds can be used to pay for college.

6) If the 529 plan funds are not used for college...tax & penalty will be assessed at grandparent's tax rate.

Question from Liz Farrell:
    Are there any general rules of thumb on how much a family should be expected to save for their child's college education? When should they start saving, and do colleges expect them to save a certain percentage of their income, regardless of income level?

Rick Darvis:
    Ideally, parents should start saving for college at birth because this will drastically reduce the amount of future funds that they will have to come up with. They should save as much as they can comfortably afford. This is why increasing a family's cash flow is important so that they can save for college. Unfortunately, most parents don't want to sacrifice their current lifestyle or rob their future retirement to save for college.

Colleges can't control how much a family saves for college but they will expect a certain percentage of the savings to be used for college.

Question from Liz Farrell:
    What are the most common mistakes you see families make when they apply for financial aid? Are there any particular questions on the FAFSA or other aid application forms that they find particularly confusing?

Rick Darvis:
    Common Mistakes:

1) Reporting assets that do not have to be reported, such as qualified retirement accounts.

2) Not knowing how to value assets. For example, how many parents know what their business is worth and what are the criteria they should use in making the valuation.

3) Assuming that the 1040 tax rules should be used in filling out a FAFSA. For example, you can file a tax return as married filing separately, but on the FAFSA you have to report both parents' income and assets.

4) Missing the college's financial aid priority deadlines.

5) Incorrectly transferring income numbers from the 1040 tax form to the FAFSA.

Question from Liz Farrell:
    Can you tell us a little bit about how recent changes to the FAFSA affect the definition of a "small" or "family-owned" business? What is the impact of those changes on how families should report their income on the form?

Rick Darvis:
    Under the recent FAFSA changes, if the family has a business that they "own and control" and has less than 100 full-time employees, the value of the business does not have to be reported on the FAFAS. The Profile form still requires the reporting of a businees.

There is no change on reporting the business income. The business asset may not have to be reported but the income from the business still needs to be reported.

Question from Liz Farrell:
    Given the recent mortgage crisis, how sympathetic do you think colleges will be towards families affected by it? Or will the widespread impact of this economic downturn mean that colleges cannot afford to offer more aid to everyone affected?

Rick Darvis:
    I think the mortgage and credit crisis will have a big impact on the student loan industry. Obtaining student loans will not be nearly as easy as it once was. Because of the lack of home or student loans that will be available to families, it will become much more difficult for families to pay for college. It remains to be seen whether colleges will be able to afford to award more financial aid to families to help them pay for college. Personally, I think it will be more difficult for colleges to award more aid to the students.

Question from Lisa:
    I have a joint savings account in my name & my daughter's name--would that be weighed at the 20% rate or 5% rate?

Rick Darvis:
    If only your social security number is on the account it would be considered your asset (5.6%). If it is indeed a joint account and both of you contributed to the account equally, then I would show half as your asset and half as your daughter's asset.

Question from Single parent:
    As a single parent of a 15 year old who has only recently been able to collect any child support from the father, I do not anticipate the father being willing to help pay for college. Will the financial aid offices accept that I will be the sole contributor?

Rick Darvis:
    On the FAFSA, they will not want the father's financial information, only yours. Therefore, the financial aid will be based solely on your financial information.

On the Profile form, it could ask for the non-custodial parent's financial information. You would have to directly appeal to the college financial aid office for help in this situation.

Question from Joe:
    Does FAFSA require you to submit your tax return? If yes, what year?

Rick Darvis:
    Your tax return will be required if you are selected for "verification". At least 30% of all FAFSAs are selected for verification.

The tax return will be for tax year prior to your child's academic year. For example, if your child is attending the academic year 2008-09, your 2007 tax return is the one that is looked at.

Liz Farrell (Moderator):
    We've received a wide array of questions here today, but the time for our chat is up. Thanks so much to all of the readers who submitted questions, and thanks again to Mr. Darvis for providing his expertise on the often confusing world of financial aid.

Rick Darvis:
    Hopefully, you can see that there are many questions that people have regarding the funding of college.

If you have any other questions, you can reach me at staff@niccp.com