Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, November 27, 1995 TAG: 9511280034
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
You have to act in advance of the college year because the standard formula for determining a family's ability to contribute toward college costs is based on the preceding year's income and assets.
If the family cannot pay the entire cost to attend a specific college, according to the Institute of Certified Financial Planners, the difference may be made up in financial aid. This typically is a package of loans, grants and work study.
The standard financial aid formula is based on four major factors, the planners said:
Parents' income. This includes taxable and nontaxable income in the year preceding the year the aid is granted, minus an allowance for living expenses (currently $17,150 for a family of four), as well as taxes, Social Security and an employment expense allowance for working parents (up to $2,500).
The "available income" that is left over is multiplied by a percentage ranging from 22 percent to 47 percent. The higher your available income, the higher the percentage.
Parents' assets. This includes stocks, bonds, savings accounts and business assets, minus an asset-protection allowance. The older you are, the larger the allowance.
The result is multiplied by 5.6 percent. Parental assets are not counted for families with adjusted gross incomes below $50,000.
Student's income. The student is expected to contribute 50 percent of available income to college costs.
Student's assets. There is no asset-protection allowance for students. The student is expected to contribute 35 percent of the value of his or her assets toward college expenses.
Some adjustments are made in the four-item formula in cases where family finances may be affected by divorce or marital separation, the planners said. The ratios also change if more than one child is in college.
With these factors in mind, the planners said, families should consider the following strategies:
If possible and appropriate, postpone receiving some income, such as a bonus, into 1996 if you're applying for aid for 1996 based on 1995 income.
Consider accelerating income into 1995, on the other hand, if you're applying for aid in 1997. This will reduce the amount of your income in 1996, the formula year for 1997 college assistance.
If it makes sense for investment reasons, consider accelerating or postponing (depending on the year of aid) the sale of profitable assets.
If money is in a custodial account - and thus in the child's name and counted as student assets - consider spending some of it on noncollege expenses on behalf of the child, such as orthodontic work, soccer camp or a computer.
This strategy reduces the student's assets, which are counted more heavily than the parents' assets, and frees up more of the parents' money for college.
Kick extra money into qualified retirement accounts, such as 401(k) plans.
It's always a good idea to save for retirement, and these assets may not be counted in the parental asset calculation, except for contributions made the year before receiving aid.
While one or more of these strategies may be useful, the planners said, you should keep in mind that much of the aid that students receive today is in the form of loans that must be paid back.
Saving as much as possible before college, even if it reduces the amount of available aid, still may be the best option for many families. The best approach will depend on your age, financial situation and other factors. You may want help from your own certified financial planner.
In applying for financial aid, the planners said, be aware that many schools are using a new application process known as Profile. Profile is a simpler and more customized process for students applying for institutional and private financial aid from participating colleges.
Application for federal and nonparticipating school aid still must be done through the Free Application for Federal Student Aid.
The federal application is still the basic form, said Julie Sina, director of scholarships and financial aid at Virginia Tech. Tech will soon have the form on the Internet for filing with the federal processor who, in turn, will send it to up to six colleges.
The electronic form, she said, will stop anyone who fails to provide required financial information.
When you file, be sure to have your tax records (or estimates for tax year 1995), bank statements for various accounts and documents pertaining to assets. These records must be submitted for both parents and the student.
Even though you must plan your finances before the end of the year, you cannot apply for financial aid before January, said Sina.
She said it is important to know the deadline for on-time applications at each college in which the student has an interest. Virginia Tech's deadline is March 15, Sina said, but many colleges require applications to be filed by March 1.
by CNB