As of July 1, 2023, the Free Application for Federal Student Aid (FAFSA) form will be simplified from 108 questions to roughly 36. 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). Forbes outlines changes to the federal aid formula. Though the legislature is an attempt to clarify the true cost of college to parents, it is still quite complex.
There are many ways that you can save on the cost of college. If you happen to be a small business owner, understanding the SAI will help when saving for college (We’re talking thousands of dollars). How you structure your business and where you hold assets can all affect your SAI.
Try these strategies to make your business work to your advantage:
If you’re a business owner, you can 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. The asset protection allowance remains unchanged in the new legislature.
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.
Another way that small business owners can save is to change the legal structure of your business in order to reduce your gross income. If you have a sole proprietorship, consider converting to an S Corporation, so you can shelter non-retirement assets. Already have an S Corporation? Converting to a C-Corporation, or a “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 is often worth it.
Savings: Small business owners can realize potentially 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.
One advantage of owning a small business and hiring your spouse or children is that it allows you to set up a medical reimbursement plan (IRS Section 105) to pay for your family’s estimated medical costs (up to $5,000 per year). Currently, your child can earn up to $6,660 per year before their income is assessed under FAFSA rules. This number may change by year.
Savings: Both tax and FAFSA advantages.
One alternative is to have your children save their assets in a personal Roth IRA. These are not counted into the financial aid formula. Plus, as long as your child uses the funds to pay for qualified education expenses, the 10% penalty for withdrawing funds before age 59 ½ is waived.
Savings: A student’s Roth IRA won’t figure into a family’s SAI. Parents’ assets are assessed at 5.64% (top bracket). Children’s assets are assessed much higher, at 20%.
Maybe grandma and grandpa opened a 529 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 donations for a child’s last year of school 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.
It’s generally not a good idea to deplete retirement savings to cover college costs, even if the penalty cost 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 funds also serve to increase a parent’s income, which will raise the SAI.
Talk to your tax advisor about how to effectively withdraw from your 529. 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 because the government considers this “double-dipping.” In order to receive the tax benefits, it is best to pay at least $4,000 on tuition with money outside of the 529, which will allow you to use the 529 on the remaining tuition balance tax-free.
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 on college costs up to $2,500 in the form of “free money” from the government.
The book Paying for College, 2021: Everything You Need to Maximize Financial Aid and Afford College by Kalman Chany and The Princeton Review is a great place to start. A CPA can provide further assistance. But, to make sure you have the most current, complete information available, consult an experienced college planning specialist.
Savings: The potential to save on college costs comes from all the tips listed here, plus more that fit your personal situation.
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: With a school that doesn’t use home equity to pay down one’s mortgage, cashing in $150,000 in stocks to pay down a home mortgage could save $7,500 a year in college costs. But at schools that use Institutional Methodology, which assesses home equity, this not only wipes out that potential $7,500 savings but costs in potential future earnings by liquidating the stocks.
A change in family income and unexpected medical expenses are both valid reasons to appeal awards. It also can be worth appealing if one or more schools that are similar to your child’s first-choice school offer a higher award. In this case, if you go back to that first-choice school, they’ll sometimes sweeten their offer. For best results, read up on how to write a good appeals letter before you act, or seek out the advice of a local college coach who does this kind of work.
Savings: When your child is able to attend their first-choice school at a price you can afford—priceless.
This is an updated version of an article originally published on June 12, 2018.]
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Jim Slowik strategizes for families of all incomes to leave no stone unturned to reduce college costs. Jim has worked for over 30 years in marketing and management with 20 of those years in financially related industries. As a parent of college students, Jim understands the challenges of navigating the college process. He holds a…
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