Paying for College: FAFSA and Other "Timely" Lessons

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It's FAFSA Time for High School Seniors

Remember how far away Christmas seemed when you were a kid? Even an hour seemed like an eternity at the beginning of a Sunday sermon or the last class of the day. Then, one day, you look in the mirror and wonder where all of the time went.

Nowhere has that been more apparent than around our house the last couple of weeks. First, our son received his first college acceptance letter (Whoop!). How has that little boy that was only slightly larger than his backpack as he walked to the bus stop grown up so fast? A few days later, his mother and I joined him on the field for Senior Night at his last home regular season football game. It couldn't have been more than a year or two ago that we attended his first Pop Warner football game on that same field, right?

I catch myself trying to account for all of that time more and more recently, such as last weekend while watching college football over at a friend’s house. He and and his family were some of the first friends we made shortly after we moved to Austin when our son was in first grade. The teeball team we met them through was the first of many shared experiences between our families and children. As is common when we get together, our conversation turned to the kids' most recent milestones.

Both of the boys' recent college acceptances prompted our discussion that evening. At some point, I mentioned that we had only just completed the FAFSA the night before.

“FAFSA?” my buddy asked.

“It’s the Free Application for Federal Student Aid,” I replied.

“Oh, well us one percenters won’t be needing to fill out any of that,” he jokingly said.

It turns out, the joke may be on him.

Now, if you’re in the top 1% for income ($430,600 for households) or net worth ($10,374,030)[i], it is true that you won’t qualify for any needs-based financial aid. What many like my friend don’t realize though, is that some universities won't offer ANY scholarships (including merit-based) if there isn't a completed FAFSA. Even more pressing, some of those scholarships are "first come, first served", which means an application delayed may be an application denied. FAFSA has been open since October 1 for the upcoming 2018-19 school year.

Having just completed the process, there were a couple of other lessons we learned that I realized would have been nice to know a few years ago. For some of you parents that aren't quite as far along as we are, it may not be too late to avoid the following "mistakes".

Use the Proper Title

It's not uncommon for a well-meaning parent or grandparent to establish a savings account, brokerage account, or a 529 college savings plan in a minor child's name with the adult acting as the custodian. These registrations are referred to as Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA), depending on your state.

While there are many positives for youngsters learning to appreciate and manage money at a young age, when it comes to college aid, these accounts may be a hindrance. The FAFSA formulas used to determine how much of college you should be on the hook for, known as an expected family contribution (EFC), put a heavier weight on assets titled in the student's name (20%) versus those in the parents’ (5.64%).

The solution with 529 Plans and Coverdell ESAs is to leave the ownership in the name of the parent/grandparent with the student as a beneficiary. For checking or savings accounts, it can be a bit more complicated.

I asked Mark Odom, a Senior VP at Frost Bank in Austin, for his thoughts. He explained, "A parent can add a minor as an authorized agent to an account that is owned by the adult. The account would typically be opened separately from other household funds and used exclusively by the minor. A debit card in the minor's name or adding them as a signer to checks can give access to the funds. This approach can provide your child a sense of ownership and responsibility but avoid the “penalty” of outright ownership."

Mind the Calendar

For those parents that may be considering selling an appreciated asset or taking a retirement account distribution, it pays to consider WHEN the sale or distribution is taken. FAFSA uses the parent's income from the calendar year that their graduating senior began as high school juniors.

If you have a junior in the class of '19, that means this may not be the year to exercise those stock options or take profits from the Bitcoin and FANG stocks that you bought a few years ago. If you have other circumstances that may allow you to manage your income this year (delay retirement distributions, accelerate investments in your business, etc.), it may pay. Literally.

Time is flying. Get in touch if you need help.