College Financial Planning Presentation to Merrimack Valley Estate Planning Council on Tuesday, September 6, 2011. Review of effective cash flow, income and asset strategies that lower college costs, qualify for financial aid and structure tax scholarships for high earning late starter parents

1. Money Coach Road Map Series
Paying Less for College: Funding the Tab
Effective Strategies That Protect A Retirement Nest Egg
Presented to Merrimack Valley Estate Planning Council
September 6, 2011
Clear View Wealth Advisors, LLC.
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2. Money Coach Road Map Series
Paying Less for College
Presented by
Steve Stanganelli, CFP® CONGRATULATIONS!
aka Spencer’s Dad
Your clients have at least one
student going to college.
They obviously have:
a.) Smart Kids
b.) Motivated Them
c.) A Willingness to Invest in their
kids
d.) A Success Problem
They Grow Up Fast!
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3. The Competition
The Applicant Pool
3M H.S. Grads/Yr
2M H.S. Grads/Yr Apply for College
Boston 1998 16k $27k/Yr
College Applicants
Boston 2009 31k $54k/yr
College Applicants
Dartmouth 1998 10k $29k/Yr
Applicants
Dartmouth 2009 30k $52k/Yr
Applicants
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4. The Selection Process
Applicant Profile for Top Rank Schools & Ivies:
• Top 5% (about 100k applicants)
• GPA: 3.7+
• SAT: 720+
• Reading Scores: 56% > 700
• Math Scores: 57% > 700
Process Looks More Selective Because of Expanding
Applicant Pool
TIP: Look at Colleges Where Credentials Rank the Student in
Top Quartile for That School
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5. There are two very different
prices for college — one for the
informed “buyer” and one for
the uninformed “buyer.”
Which price will your client
pay?
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6. Current Problem
Top PARENT CONCERNS in order of importance
1. Fear parent death before children are grown
2. Saving for retirement
3. Job security
4. Saving and paying for college
College Costs Keep Going UP!!
Increasing 2-3x rate of inflation
2010 Annual Average Costs:*
1. Public University - $16,000
2. Private College - $37,000
*College Board – Trends in College Pricing 2010
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7. Parent Concerns
What Concerns Parents About College
• When to begin planning
• What needs to be done
• Finding a “good fit”
• Paying for college without going broke
• Increasing difficulty of gaining admission to better
schools even for well-qualified students
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8. College – Still Worth It?
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9. NEW YORK TIMES
(5/18/2011)
“Median starting salary
for students graduating
from four-year colleges in
2009 and 2010 was
$27,000, down from
$30,000 for those who
entered the work force in
2006 to 2008.”
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10. Clear View Wealth Advisors, LLC.
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11. Funding the College Tab
Parents %
30
25
20
15
Parents %
10
5 Source: Fidelity &
Investment News, 8/29/11
0
2007 2008 2009 2010 2011
Percentage of Projected Costs Typical Family On Track to Cover
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12. Concept 1:
College is a retirement
problem:
Every dollar going toward college
can’t go toward retirement
Parents are entitled to a life after college
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13. Concept 2:
Saving ON College is Different
than Saving FOR College
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14. The College Funding /
Retirement Savings Dilemma
Two VERY EMOTIONAL NEEDS competing
for the same limited resources
Will parents be able to accomplish BOTH?
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15. Secrets to reducing the
high cost of college
College planning -- there is no one size fits all solution.
 Avoid “Sticker Price Shopping”
 Integrate College Search with Financial Strategy
 Find a School That Matches Interests & Abilities
 Don’t Obsess Over Brand Name Schools
 Plan to Optimize the EFC
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16. Sticker Price Shopping –
Don’t Be Deceived
College A College B College C
Cost of Attendance $20,000 $30,000 $40,000
EFC from FAFSA ($10,000) ($10,000) ($10,000)
NEED $10,000 $20,000 $30,000
Avg % of Need Met 60% 70% 80%
Estimated Award $6,000 $14,000 $24,000
Estimated GAP $4,000 $6,000 $6,000
Potential Net Cost $14,000 $16,000 $16,000
Estimates do not reflect any specific college statistics
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17. The Real Cost of a Degree
College Total Cost % of Avg. Net Avg. Net
of Students Price Price
Attendance paying full
(in-state) price
Marquette $39,600 22% $24,900 $29,700
Middlebury $52,500 52% $21,700 $36,200
Princeton $49,800 43% $16,510 $24,600
U of GA $16,800 25% $10,600 $10,900
U of TX $21,900 51% $20,200 $21,000
Avg. Net Price for households with income between $75k and $110k and receiving federal aid
Source: MONEY, Sept 2011, page 120; Department of Education 2008-09 academic year
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18. Example of financial aid eligibility
EFC = $15,000
Formula:
Financial Need = Cost of Attendance - EFC
College Cost of Attendance EFC Financial Need
1. James Madison $21,000* $15,000 $3,988
2. Georgetown $54,000* $15,000 $38,880
*Source – College Board 2011
For financial aid candidates:
Your EFC is the primary determinant for your out-of-pocket college costs, NOT
the cost of the college!
Don’t eliminate consideration of schools with higher “sticker prices!”
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19. Understanding Financial Aid
Financial Aid Formulas are INCOME Driven and Not Asset Driven
Parent Income Student Income
Max Assessment = 47% FM Assesses: 50% after
AFTER ALLOWANCES first $5250
(between 22% - 47%) IM Assesses: $1550 min,
then 50%
Parent Assets Student Assets
Max Assessment: 5.64% FM Assesses: 20%
AFTER ALLOWANCES IM Assesses: 25%
Parent Contribution + Student Contribution =
Expected Family Contribution (EFC)
It’s Key To Understand the Financial Aid Strength & History of Each School
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20. Understanding Financial Aid – Basics
Federal Methodology (FM) Institutional Methodology (IM)
Uses FAFSA Uses FAFSA & CSS Profile
Student Assets Assessed @ 20% Student Assets Assessed @ 25%
Student Income Assessed @ 50% Student Income Assessed @ 50%
with $5,250 Allowance with No Allowance
Parent Assets Assessed at 5.6% Parent Assets Assessed at 5% with
with Exemption Allowance Lower Exemption Allowance Based
Depending on Age on Family Size
Parent Income Assessed Between Parent Income Assessed Between
22% to 47% 22% and 47%
Does NOT Assess Family-Owned Assesses Farm and Business
Farms or Businesses with < 100 FT Equity
Employees
Does NOT Assess Home Equity DOES Assess Home Equity
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21. Foundation for effective college planning
EFC
FAFSA / PROFILE
Leverage financial aid
enhancing strategies
Leverage other strategies
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22. Saving ON the cost of college
Cost-Cutting Strategies for Every Family
Regardless of Financial Need Status
Some Examples: -
• Take Tests for College Credit
• Advanced Placement (AP) Tests
• College Level Examination Program (CLEP)
• Proprietary Self-Study Option: DSST
• International Baccalaureate (IB)
• Go to a Local State School for A Degree or Transfer Credits
• Pursue a Degree at a Lower-Cost School Abroad
• Pursue Private Scholarships like Kiwanis or Rotary
• Pursue Merit Scholarships (see www.Petersons,com)
• NOTE: Private schools offer more than public
(Ivies do not offer)
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23. Saving ON the cost of college
“Tax Scholarships”
 Structuring Your Income, Business and Tax Filings to
Maximize Tax Savings
 Money Saved on Taxes Worth More Than Financial Aid
Examples:
 Implementing Employer-Provided Education Benefits
 Gifting Appreciated Investments
 Gifting Depreciated Business Assets
 Refinancing and Using Proceeds for Immediate Annuity
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24. Helpful Resources
Sources for:
• Estimating EFC before hand. How much will you be expected to pay?
a. Finaid.org
b. CollegeBoard.org
• Strategies for increasing financial aid eligibility
a. Book: ―Paying for College Without Going Broke‖
b. Website: Finaid.org
• Resources for Finding Scholarships
a. Websites: FastWeb.com, CollegeBoard.com,
Petersons.com, ScholarshipCoach.com,
ScholarshipExperts.com, CollegeCashPros.com
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25. Planning for financial aid
Source Options
Strategies School merit-basedfinancial aid
Free
•
that increase
• School need-based
scholarships
financial aid eligibility will
• Grants - Pell
reduce out-of-pocket college
costs, the gap and need for
Cheap • Subsidized loans – Stafford, Perkins
debt financing
• College Savings
Gap • Other loans: Private/PLUS/Home Equity
• Third party – grandparents, relatives
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26. Late-Stage Planning
for Higher Income Clients
Clients May Consider the Following:
 Take Hope & Lifetime Learning Credits
 Use Another Family Member’s Lower Tax Bracket
 Employ Their Children
 Establish an Educational Assistance Plan Through Client’s
Business
 Use Smarter Borrowing Techniques
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27. What NOT TO DO:
The less you know, the more you pay
Fact: Gifting money to financial aid candidate will reduce financial aid eligibility
Result: Cost the family $$$ in financial aid lost!
Example: Grandparents gift $10,000 to grandchild for college, may cost the family
as much as $7,000 in financial aid!
Lack of knowledge results in lost financial aid
Strategy:
Wait until after college to gift – help pay off student loans. No lost financial aid.
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28. Knowing WHAT TO DO –
the more you know, the less you pay
Facts: Family income of $57,000. Assessable assets of $200,000
Strategy - Reduce AGI below $50,000 by contributing to retirement accounts
Result - Family qualifies for ―Simplified EFC.‖* Assets of $200,000 are not
included in financial aid formula and family qualifies for significantly more
financial aid. * Note: Assumes filing a 1040EZ or 1040A
May save parents $$ over four years!
What will savings on college costs AND increased retirement account
contributions mean for retirement income and quality of life?
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29. Knowing WHAT TO DO –
the more you know, the less you pay
Strategies for Increasing Need-Based Aid:
Controlling or Changing the Position of Assets
Some Examples: -
• Don’t Hold Assets in Your Child’s Name
• Maximize Non-Assessable Assets: IRAs, SEP IRAs, Roth IRAs, 403bs,
401ks, Annuities, Cash Value Life Insurance
• Don’t Overestimate the Value or Your Home, Other Real Estate or Business
• Restructure Your Debts (Ex. Refinance Credit Cards to Lower Home Equity)
• Pay Off Debts or Make Needed Purchases = Show Less Cash
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30. Planning for high income late starters
Source Options
The cumulative effect of
• School merit-based scholarships
Free
implementing and coordinating
the right strategies can be • Savings strategies
significant savings on out-of- •
•
Cash flow strategies
Income and asset planning strategies
Gap pocket college costs
• Strategies for business owners
• Strategies for grandparents
• Tax credit strategies
• Gifting strategies
• Loan strategies
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31. Example
Facts: Parents income too high to qualify for education tax credit. Limited benefit from
personal exemption. Plan to liquidate appreciated assets to pay for college OR ―write a
check.‖
Effect: Parents will pay capital gains (can increase real cost of college), no benefit
from tax credit. If paid with after tax income, the real cost of college is twice the ―sticker
price‖.
Better Strategy: Gift appreciated assets to child to help pay college costs. Child
fulfills requirement for tax independence during college years and qualifies for
education credits. Child pays NO tax due to deductions
Better Results:
•Parents maintain control of asset until senior year of H.S.
•Increased cash flow – don’t use after-tax income
•Student qualifies for education tax credit
•Tax savings
•Parents – on capital gains = $$$
•Student - education tax credits – as much as $2,500/year based on 2010 maximum credit.
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32. Case Study: Late-Stage/High Income
Student: Jay , entering high school, not a candidate for need-based aid
College: Colby
Cost of Attendance: $54,000 (1 year); $244,400 (4 years)
EFC: $54,000
Parents: Own Contracting Business and Rental Properties with Fully
Depreciated Assets
Tax Bracket: 33% combined Federal & State
BASE YEAR INCOME (AGI): > $135,000
______________________________________________________________
POSSIBLE SOLUTIONS:
 Family Limited Partnership
 Gift of Business Assets with Leaseback
 Crummy Trust to Shift Income/Maintain Control
 Employer-Sponsored Education Assistance Program
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33. INCOME STRATEGIES
Savings from Tax Strategies: $12,508
• $11,147 (Federal – one year)
• $1,361 (State – one year)
 Lower Owner’s Draw and Shifted Income to Cover Hiring Son –
Save $1500 in Income Taxes
 Implement EAP – Save $1400 in Income Taxes
 ROTH IRA for Son’s Earnings
 Gift $52,000 of Business Equipment to 4 Children and Pay
Rental Rate – Save $1700 in Income Taxes
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34. Cash Flow Strategies
BORROW SMART with a PLAN
Refinance Home and Use Proceeds to Fund Immediate Annuity
• Increases Interest Deduction (possible tax savings of $3,000)
• Annuity Payments Guaranteed and Fixed
• May Improve Cash Flow
• Negligible Tax & Financial Aid Implications
Increased Cash Flow During College $26,686
PLUS Loans $236,000
PLUS Pymts (13 Yrs @ 7.9%) $342,661
Immediate Annuity Pymt (10 Yrs) $263,600
Total Shortfall Using Annuity to Offset $79,076
Tax Savings Due to Refi $34,118
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35. Savings and Funding Strategies
Consider savings and funding vehicles that meet the following objectives.
1. Funds for college
2. Savings for retirement
3. Minimal impact on monthly cash-flow
4. Appropriate for college AND retirement - flexibility
Goals:
1. Return exceeds college inflation
2. Tax-deferred growth
3. Tax-favored access for college
4. Favorable for financial aid
5. Can be used for college AND retirement
6. Tax-favored access for retirement
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36. Comparison of Options –
how do they rate?
Option Pros Cons
Roth IRA Accessed Earnings May
Penalty Free Be Counted as
Income for EFC
529 College Growth Tax- Assessable
Savings Plan Deferred & Asset for
Withdrawals Tax Financial Aid Wow, So many
options, but
Free which is the
right one for my
CollegeSure Low Risk / FDIC Assessable family?
CDs Insured Asset for
Financial Aid
UTMA / UGMA Taxed at Child’s Subject to 529
Rate for first ―Kiddie Tax‖ if
$1800 account
generated generates >
$1800/year
Retirement Plan Tax-deferred / Distributions
at Work Loan possible fully taxable
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37. Achieving the best outcome
College admissions and
financial aid process
Begins junior year in high school
College financial planning – newborn through senior year in high school and extends throughout college
years
College Planning Tactical Planning
Timeline
l l l l l l l l l l l l l l l l l l l l l l
Age of child 0 1 2… 17 18
Help you work toward a best outcome
1. Lowest out-of-pocket costs for family
2. Best college fit for student
3. Combine longer-term strategic planning with nearer term tactical moves
BEST COLLEGE at the RIGHT PRICE … without you
going broke or busting your retirement nest egg
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38. The Money Factor: Takeaways
The KEY CONCEPTS Cheat Sheet:
• Define ―Financial Need‖
• Calculate EFC
• Optimize the EFC
• Proper Planning Leads to ―Tax Scholarships‖
• Employ Cost-Cutting Alternatives
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39. Informed or Uninformed :
Your Clients Have a Choice
__
Which type of buyer of a
college education will your
client choose to be?
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Clear View Wealth Advisors, LLC, A registered investment advisor.
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40. Informed or
Uninformed – Which
buyer of a college
education will you
choose to be?
Uninformed buyer!
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Securities and advisory services offered through LPL Financial, A registered investment advisor. Member FINRA/SIPC
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