college financial planners and financial aid—do they have a

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


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?

Presenters

John Pearson, CPA, CCPS

Tax and Educational Strategies

Norwalk, Connecticut

Mick Endersbe, CHFC, MS

President

College Planning University, LLC

Lakeville, Minnesota


Apply Here For YourTax Scholarship!!

John Pearson, CPA, CCPS

Tax and Education Strategies17 Pumpkin Lane

Norwalk, CT 06851203-984-2518

www.taxscholarship.net

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

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?

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.)

What is this building?

Important Terms

• Adjusted Gross Income• Tax Deduction• Tax Credit• Exemption• Standard Deduction• Alternative Minimum Tax• Education Tax Incentives• Tax Bracket

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

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

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

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

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

* 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

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

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

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

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

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

“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

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

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

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

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)

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!!!

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

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

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

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?

Why Can’t I Just Borrow Against My House?

Beware The AMT!!

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?

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?

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.

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!!


What are your questions?

John F. Pearson CPA CCPS

Tax and Educational Strategies17 Pumpkin Lane

Norwalk, Connecticut 06851203-984-2518

www.johnpearsoncpa.com

Presenter

Mick Endersbe, CHFC, MS

President

College Planning University, LLC

Lakeville, Minnesota

Traditional College Planning

• Data-based assumptions are made– Time Frames– Risk Tolerance– Rate of Return– Inflation– Savings vehicle

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

The Problem with Data – Rate of Return

The Problem with Data - Saving

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

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

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

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.”

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

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)

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.


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?

college financial planners and financial aid—do they have a

Documents

tax scholarship

ccps tax

state tax

asia tax incentives

current tax incentives

average cost

federal income tax deductible

inadequate education