College Financial Planners and Financial Aid—Do They Have a ...
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National Association of Student Financial Aid Administrators
The following is a presentation The following is a presentation prepared for NASFAA’s 2006 prepared for NASFAA’s 2006
Conference in Seattle, WAConference in Seattle, WAJuly 5-8, 2006July 5-8, 2006
National Association of Student Financial Aid Administrators
College Financial Planners and College Financial Planners and Financial Aid - Do They Have a Financial Aid - Do They Have a
Role to Play?Role to Play?
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Presenters
John Pearson, CPA, CCPS
Tax and Educational Strategies
Norwalk, Connecticut
Mick Endersbe, CHFC, MS
President
College Planning University, LLC
Lakeville, Minnesota
National Association of Student Financial Aid Administrators
Apply Here For YourTax Scholarship!!
John Pearson, CPA, CCPS
Tax and Education Strategies17 Pumpkin Lane
Norwalk, CT 06851203-984-2518
www.taxscholarship.net
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Today’s Goal
• Not to retread paths of student loans and government grants
• No 529 savings plans• Not to “game” the financial aid system• Not to search for obscure scholarships• Seek practical solutions using tax, debt,
consultative, and cash flow management to reduce the after-tax cost of college
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Warm-up Quiz
• Desirable student with significant financial need applies to six colleges, with two top choices.
• School “A” offers her a full scholarship for tuition and fees…her other top choice offers her $$ that leaves a nearly identical COA for family to fund.
• She declines School “A”’s offer in favor of School “B” on a financial basis. Her parents state that even though the net COA were almost exactly the same, School “A’s” offer would have cost them $6,000-$7,000 more!!
• How could this be?
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Which of these student expenses are federal income tax deductible?
• Music lessons• SAT preparation courses• Sports training• Student abroad travel• Educational consultant fees• Weddings• Tutoring• Technology (computers, cell phones, etc.)
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What is this building?
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Important Terms
• Adjusted Gross Income• Tax Deduction• Tax Credit• Exemption• Standard Deduction• Alternative Minimum Tax• Education Tax Incentives• Tax Bracket
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Current Tax Incentives For Education
• Scholarship Exclusion• Educational reimbursement plan• 529/Prepaid tuition plan• Student loan interest deduction• Tuition deduction (expiring)• Hope and Lifetime Learning Credit
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So Who Are We Talking About?
• Middle and upper middle class America
• Living in areas w/ above average cost of living and median incomes
• The “house rich/cash poor” who don’t get need based aid
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And What Are Their Problems?
• College prices rising beyond inflation rate
• Parents have saved little if anything
• Parents already have high debt levels
• Students facing debt from college/credit cards
• Graduation rates are extending
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As If That Weren’t Enough!
• Rising energy and health care cost
• Beginning of demographic shift of jobs to Asia
• Tax incentives for education are inadequate
• Education cost is shooting holes in Boomers biggest goal... Retirement
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So How Are The Boomers Doing It?
• Paying out of cash flow• Using up
savings/reducing retirement contributions
• Obtaining scholarships• Going to the
grandparents• Students are working
more hours• But mostly, both parents
and students are borrowing
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* Assumes 28% bracket Federal and 5% State TaxThe average annual cost of year public college is $13,800, Private university is $29,500 Source: Harris
Insight Funds
To Pay For One Child’s College,You Need To Earn
For 5 Years of Average Public University$111,000
For 4 Years of Average Private University$190,000
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How paying for education impacts retirement
• Assume parents age 44, children 18 and 14, both attending private college 4 years
• Initial cost is $25,000 after aid, 5% inflation• Assets invested at 8% compound• At age 65, parents retirement pool is
reduced by:
$846,426
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And what if those children attend private high school
• Parents begin at age 40 with students 14 and 10, both attend private school beginning in grade 9.
• Annual Cost is $20,000, 5% inflation• 8% investment assumption• Private college follows at 5% inflation• Retirement savings would decline at age 65 by
$1,767,668
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An EFC Scenario
• AGI of $76,000– Wages $75K (Wife earns $50K, Husband $25K)
• Parents have $30K in cash/savings• Kids are 18 and 14
– Older child has $3K of summer earnings, $5K assets– Younger child has $5K of assets
• $150K of home equity• Claimed the Hope Credit of $1500
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And the EFC is……?
• Under the Federal Methodology the parents EFC
is $12,304• Under the Institutional Methodology the parents
EFC is $14,917Source: College Board Online Financial Aid Estimator
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Adding Some Wages…
• If AGI bumps to $101,000…– Wages split $75,000/$25,000– Everything else stays the same
• EFC jumps to $22,567/$22,544• AGI at $126,000 (Split $75,000/$50,000)
• EFC becomes $33,278/$31,998Source: College Board Online Financial Aid Estimator
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“Shifting and Gifting”
Shifting •Move earned income from the parent to the child•Best done if family has a family business or farm•Taxed in a lower bracket of the child
Gifting•Use appreciated assets like stock•Student uses stock sale proceeds to pay for college•Gains taxed at lower bracket
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Private School YearsTax deductions$5,000 standard deduction
Child
Parent’s•personal assets•compensation from business
It’s time to pay for private school.
Gift assets and/or pay child
Child is taxed on:•Earned income•Unearned income
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Private High School
Child’s Earned Income $5,000Child’s Std. Deduction ($5,000)
Federal Tax due $ 0
Parent’s Tax Savings
Earned Income $5,00033% fed/state tax rate $1,650
Tax that parent’s avoided $1,650
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Private High School Tax Savings
Income shifted $ 5,000/year
Four years $20,000
Child’s Tax $ 0
Parent’s Tax Avoided $ 6,600 ($1,650/yr/4yrs)
Tax savings + 8% return $ 7,500 ($1,650/yr/4yrs/@8%)
At End of College $ 10,200
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The Reality of Paying for College
At AGI of $130,000 + (joint return)•No Hope Credit•No Lifetime Learning Credit•No Need-Based Financial Aid (rare exceptions)
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Enter the Tax Scholarship
• Direct wages from family business to child
• Transfer appreciated property to child
• Total should be enough to have child provide more than ½ their own support
Result: Student gets exemption, education credits and their own standard deduction!!!
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Example College Years 1-2
• Student selects private college - $33,000 cost• Parents pay child $13,000 out of family business
for office and marketing work• Gift $22,000 of low-basis stock to child• Child uses cash to pay for college• If not transferred to child, parent’s federal tax on
all this income approx $6,500
• Childs tax on the same income is $0
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In College Years 3 and 4
• Give student a raise to $17,000 of wages
• Transfer stock to the child as before
• Parent’s tax burden if income was left with them would be $7,500
• Child’s tax? $0
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Tax Scholarship Summary
• Total college tax savings per child? $28,000
• If student attended private school, per my example $6,600 additional saved
• If invested, total savings total approximately $40,000….per child
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Should I restructure mortgage?
• Real estate market in region is slowing
• Is paying down your mortgage such a great idea in this environment if you are cash poor?
• What are you earning on the paydown?
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Why Can’t I Just Borrow Against My House?
Beware The AMT!!
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Common Questions
• If my child isn’t my dependent, are they no longer covered under my benefits?
• In your example, you didn’t include state taxes on the child, and what about Social Security Taxes?
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Common Questions
• What kind of work could my child possibly do to justify such a large wage?
• What other things could I pay for using this concept?
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Getting The Word Out
• Public relations-national and local media• Local, regional and national seminars• Making contacts at independent schools• Developing relationships with the Financial Aid
and Admissions community– Asking colleges and universities to consider providing
this kind of education…to parents!!– Parent enrichment at orientation or scheduled high
school visit days– High Schools are “off limits” due to “non-profit” rules.
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Why should we bother?
• Marketing value is tremendous• Existing clients appreciate the value added• Potential new clients have never heard these type
of ideas…..from anyone• Even if they don’t act on them, they appreciate
being told that they have choices!!• If they do act on them, made the education more
affordable!!
National Association of Student Financial Aid Administrators
What are your questions?
John F. Pearson CPA CCPS
Tax and Educational Strategies17 Pumpkin Lane
Norwalk, Connecticut 06851203-984-2518
www.johnpearsoncpa.com
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Presenter
Mick Endersbe, CHFC, MS
President
College Planning University, LLC
Lakeville, Minnesota
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Traditional College Planning
• Data-based assumptions are made– Time Frames– Risk Tolerance– Rate of Return– Inflation– Savings vehicle
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The Problem with Data - Inflation
• “In each of the past four years, tuition has increased by 10 percent or more.”– Minnesota State Colleges and Universities News Release,
October 20, 2004
• “The Minnesota State Colleges and Universities Board of Trustees has capped tuition increases at 7 percent in the coming year. The decision comes after the trustees endured a barrage of student complaints about rising college costs during recent budget discussions. The cap is a hardship for at least 20 of the system's institutions that have already budgeted for tuition increases higher than that.”– Minnesota Public Radio, July 21, 2005
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The Problem with Data – Rate of Return
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The Problem with Data - Saving
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The Problem with Data – My Family
Child’s Name Carley LibbeyAge 9 9Years until college 9 9Current college cost $27,969 $27,969Current savings $10,000 $10,000Assumed rate/return 9% 9%Assumed inflation rate 7% 7%Current monthly savings $500 $500Addit’l monthly needed $797 $797
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Your College Cost @various inflation rates
$99,419
$206,486
$36,873
$76,583
$49,532
$102,873
$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000
Public
Private
4% 6% 8%
The Problem with Data – Moving targets
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The Problem with Data – We’ll go public.Family Scenario• College University of MN TC $16,344• Income $70,000 • Assets (home and IRA NA) $50,000• Number of Children 2• Ages 17 14• EFC $9,375• State Grant $0• Pell Grant $0• Stafford Loan $2,625• Parent Responsibility $13,719
x 4 years = over $55,000
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A Sample Client - Executive
• $340,000 annual income• $600,000 in investments• $300,000 in home equity• 48 years old• 4 talented, hardworking kids• Wants his kids to have the opportunity to attend
Elite schools• “The elite colleges are running about $44,000 per
year. How did you plan to pay for college?” “That’s why you’re here.”
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Tell me about Sara
• “Is there a particular school that you or Sara are interested in?” “Why?”
• “How did you think you would pay for XYZ?”– Well, we’ve done some….. $60,000– We were hoping we would get some help from the
college.– She’s a B plus student with a 29 on her ACT, debater
• “Would you send her if she didn’t get aid?”– Because she won’t - nor will any of the executive’s kids
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Our Solution
Cost $44,000 (Elite) $32,000(private)
Cash Flow $10,000 $10,000
Investments 60k/4 $15,000 $15,000
Redirect monthly savings
$ 6,000 $ 6,000
Student Work $ 3,000 $ 3,000
Student Loan $ 2,500 $ 2,500
Scholarship $ 0(need-based) $ 10,000? (merit)
Total $36,500 (Short $7500)
$ 46,500 (Over-funded by $58,000)
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Real College Financial Planning
• Done in the context of overall financial planning
• Complex, moving parts
• Investment expertise
• Tax expertise
• Financial aid expertise?
• Like all consultants, must be skilled at asking questions.
National Association of Student Financial Aid Administrators
Do you want their involvement?Do you want their involvement?If so, what would you like them If so, what would you like them
to do?to do?
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