10 Ways to Save on College Costs

As of July 1, 2023, the Free Application for Federal Student Aid (FAFSA) form will be simplified from 108 questions to roughly 36. According to the Consolidated Appropriations Act of 2021, what most families know as the complicated Expected Family Contribution (EFC) formula, which determines how much a family can receive in federal aid, will be replaced with the Student Aid Index (SAI).

The Federal student aid staff outlines changes to the aid formula. Though the legislation attempts to clarify parents’ true cost of college, it is still quite complex. However, with some care and preparation, you can save on college costs.

FAFSA Simplification Act information was provided in the Federal Register notice published on Nov. 4, 2022. The notice addressed policies that become effective for the 2023-24 Award Year.

Understanding the SAI may help small business owners prepare for college expenses. There are thousands of dollars at stake. How you structure your business and where you hold assets can affect your SAI. You can utilize your business to optimize your college savings plan and protect your assets from higher college costs and loan debt.

Strategies: Use Your Business to Save on College Costs

Hold Assets in Your Business. Save on college costs by holding assets in your business rather than in a personal account. Why? Because assets of businesses with fewer than 100 employees don’t count toward a family’s SAI. For the 2023-2024 FAFSA, parents will have zero asset protection allowance, which makes these savings strategies critical.

Savings: Personal assets are assessed at a rate of up to 5.64%, while small business assets don’t figure into the SAI formula at all.

Restructure Your Business. Change the legal structure of your business to reduce your gross income. If you have a sole proprietorship, consider converting to an S Corporation so that you can shelter non-retirement assets. Already have an S Corporation? Converting to a C Corporation, or “non-pass-through” equity, can also be a good trade-off. Yes, you’ll have to pay more taxes on corporate profits, but the potential to save on college costs may balance that.

Savings: Small business owners might realize huge savings since the income protection allowance will increase by 20% for parents. And, if you find yourself having trouble covering personal expenses, FAFSA won’t penalize you for taking a loan from your business.

Hire Your Spouse or Children. Hiring your spouse or children allows you to set up a medical reimbursement plan (IRS Section 105) to pay your family’s estimated medical costs up to $5,000 per year. Your child can earn up to $7,040 per year before their income is assessed under FAFSA rules. This number may change by year.

Savings: Both tax and FAFSA advantages.

Never Have Savings in a Student’s Name. One alternative is to have your children save their assets in personal Roth IRAs, which are not counted in the financial aid formula. Plus, as long as your child uses the funds to pay for qualified education expenses, there is no penalty for withdrawing funds before age 59½.

Savings: A student’s Roth IRA won’t figure into a family’s SAI. Parent net worth is assessed at 12% for reportable assets. Children’s assets are assessed much higher, at a flat 20%.

Tell the Grandparents Thanks, But No Thanks — for Now. Maybe grandma and grandpa opened a 529, a type of investment account or college savings plan, to save for your child’s education. That money won’t count towards your assets or your child’s assets on the FAFSA while it’s in savings, but once it’s withdrawn, watch out. It’s better to encourage the grandparents to save any contributions for a child’s last year of school, for after they’ve filed their last FAFSA, or as a gift when they graduate.

Savings: This could be in the thousands of dollars. If Grandma pays $16,300 for your child’s first year of tuition, that could raise your family’s SAI by several thousand, especially if the income protection allowance is already reached.

Leave Retirement Savings Alone. It’s generally not a good idea to deplete retirement savings to cover college costs, even if the penalty is waived. Many Americans already fall short of the minimum amount needed to retire comfortably.

Savings: Yes, the government does waive the 10% penalty on funds withdrawn to pay for college, but those additional funds increase a parent’s income, which raises the SAI.

Withdraw from Your 529. Talk to your tax advisor about how to withdraw from your 529 effectively. Doing so will make sure you don’t miss out on the American Opportunity Tax Credit. Paying a student’s entire college costs out of a 529 and reaping the benefit of the tax-free distribution disqualifies parents from also taking the American Opportunity Tax Credit. The government considers this double-dipping. In order to receive the tax benefits, so you save on college costs, it is best to pay at least $4,000 on tuition with money outside of the 529, which allows you to use the 529 tax-free on the remaining tuition balance.

Savings: The credit is calculated as 100% of the first $2,000 in tuition and fees plus 25% of the next $2,000.The credit can save up to $2,500 in free money from the government.

Educate Yourself About Reduction Strategies. The book Paying for College, 2021: Everything You Need to Maximize Financial Aid and Afford College is one tool to start with. A CPA can provide further assistance. But, to make sure you have the most current, complete information available, consult an experienced college planning specialist.

Learn Your Target Schools’ Reduction Methods. Not all schools calculate this in the same way. For example, some schools do not use the equity in one’s home to calculate federal aid, but others do.

Savings: If a school doesn’t consider home equity, cashing in $150,000 in stocks to pay down a home mortgage could save $7,500 a year in college costs. If a school uses Institutional Methodology, which assesses home equity, that wipes out the potential $7,500 savings plus other benefits.

Financial Aid Awards Can Be Appealed. A change in family income or unexpected medical expenses is a valid reason to appeal awards. It can be worthwhile to appeal if you can point to one or more schools similar to your student’s first-choice school, offering a higher award. Report your findings to that first-choice school, and they may sweeten their offer. Learn how to write a good appeals letter before you act, or seek the advice of a college finance advisor.

Savings: Your child may be able to attend their first-choice school at a price you can afford. What more could a parent ask?

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

• Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds
• All About Asset Allocation
• Personal Lines for the Business Owner/Investor

This is an updated version of an article originally published on June 12, 2018. It has been updated by Maryan Pelland]

©2022. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.