All college applicants that need a loan, scholarship or a grant must complete a financial-aid application. The process isn’t solely for those who have low enough income to qualify for aid. If you would  like to be considered for the 2017 education financial process you will need to complete the “Free Application for Federal Student Aid” or FAFSA (www.fafsa.gov). The process begins again on October 1, 2016.

Ideally, you will work closely with someone that is immersed in this process and aware of the 2015 changes enacted by President Obama. These changes will sync the timing of funding with college decisions for the 2017-2018 academic year. Though this timing is for federal financial calculations, individual institutions agreed to match up with the process for the 2017 school year. Even so, always double check with the specific college that is under consideration.

The process will now be based on 2015 year-end taxes (even if extended) for the 2017-18 school-year. There will no longer be estimating and re-adjusting as in past years. Parents and working students are encouraged to file taxes by the summer and to defer income (as much as possible) during college funding years.

Controlling the recognition of income (for both parent and student) will make it easier for students to obtain loans that have reasonable terms of repayment. In some cases, it is not possible and other ways of paying for higher education will be needed. Year-end tax planning should have a high priority starting two years before the intended college start.

So how does the 529 College Savings Plan affect your ability to receive loans or aid from the FAFSA system?  If the 529 plan is owned by the parent or dependent student it is an asset in the application (FAFSA) process, BUT qualifying distributions are not counted as income (i.e., tax free). Though grandparent owned 529 are not counted as part of the FAFSA calculation, distributions to pay for a student’s education does count as child’s income (but it is tax-free). The best way to handle grandparents’ distributions from 529 plans for students is to hold back distributing from grandparents until the last two years of a student’s college education.  So, keep in mind, it is best to take 529 distributions (from parent and student owned 529s) during the first two years and grandparent funded 529 during the last two years.

Though 529 plans are useful if your child has more than three years to go before college, they are not really effective as a short-term strategy. If you’ve little money saved and your child is to attend college within 3 years you need to consider other strategies. Consider paying the tuition yourself directly – you are allowed without tax consequences (but also no tax benefit) to pay for  higher education tuition costs directly without triggering gift tax (gift tax is triggered if you gift more than $14K in 2016). These tax-free gifts will not count as a student asset or income for financial aid purposes. This strategy works well for grandparents who can pay directly for a grandchild’s tuition and/or provide annually a gift towards expenses not exceeding the limit that year (limit of $14K in 2016).

Another strategy often quoted is gifting of appreciated assets which can be a double-edged sword since it can cause a student’s income/assets to exceed the FAFSA limits and result in the loss of access to loans or aid awards. We recommend close and careful monitoring and it is best if these tactics are reserved for the last two years of college so that there is little to no impact on the FAFSA annual calculation.

Sometimes parents have purchased Uniform Gifts to Minors Act (UGMA)/ or Uniform Transfers to Minors Act (UTMA) assets since they can be used for pre and post college funding, BUT these accounts are considered part of a student’s assets in the FAFSA application and have a significant impact on the availability of loans or aid. We recommend transferring to a 529 account, BUT this is not always a good strategy since it triggers capital gains taxes. The best strategy is to spend the account two years prior to college. These accounts have a much looser definition of how they must be used. Any expense that benefits the child other than those that a parent is required to pay are permitted. Ways we’ve seen these accounts used include: summer camp, highschool tuition, an electronic device (laptop or Smartphone) and academic tutoring.

The most important take away is that you must plan for a college account distribution two years before your student will attend college. The new rules do simplify the application process but it also means that your tax planning needs to be ahead of the student’s decision on higher education.

Finally, (like any complex financial decision) college planning can frankly add a level of discomfort and conflict to the family. But, it can also provide an opportunity. The experience, if inclusive, can be part of a shared life experience, an educational moment, and an opportunity to fulfill your goals. It is a chance to learn how to make financial decisions and feel good about them.

Stay connected with your financial advisor and discuss how to best deploy your available resources to benefit both you and the student.

Edi Alvarez, CFP^®
BS, BEd, MS

www.aikapa.com