#collegeplanning

5 Ways to Provide for Grandkids That are not Related to College

By:  Paul Horn, CFP®, CPWA® Senior Financial Planner

Most of our clients as they get older want to begin to think of ways that they can take care of their grandchildren. Most commonly the discussion revolves around opening 529 plans and saving for college. Below are five alternatives that are worth considering if you are trying to take care of grandkids:

  1. Pay for their first car. Another large expense for kids is getting them their first car. The costs of gas and insurance alone are a burden for parents. This can be a great way to bond with grandkids and help them get their first taste of freedom.
  2. Pay for vacations with the grandkids. Raising kids is expensive and there may not be a lot of money left in the parent’s budget for nice vacations. Instead of material goods, create memories that will last their lifetime. Paying for vacations with the grandkids will help them have new experiences, learn new things, and create lasting memories. I will never forget the camping and fishing trips I had with my grandparents. I learned how to bait a hook, drive a boat, and appreciate the mountains because my grandparents did this for me.
  3. Buy them their first stock. You can transfer shares to your grandkids, and this can save you on taxes since you don’t have to sell the shares. Investing on behalf of your grandkids is an excellent way to help them start on the right foot financially. This also creates a great teaching opportunity to help your grandkids to develop the right financial habits. Here are the best accounts to open for your grandkid’s future.
  4. Help them with giving to charity. Most of our clients would prefer to pass on values than assets to their kids and grandkids. Something we do is work with grandparents and have them make charitable donations each year on behalf of their grandkids. You can have the grandkids choose the charity and even give a little pitch as to why the charity deserves the money. The kids tend to love this and expect some money to go to the local animal shelter!
  5. Spend time with them. If you live close to them, kidnap the grandkids for the day. Spoil them and get them hopped up on sugar and send them home! This can provide a needed break for the parents and helps create a strong bond and lasting memories for the grandkids. At the end of the day, kids want time more than anything else (even though they won’t say it).

There are many ways to help provide for and take care of grandchildren. Many of these ideas can be done without having to break the bank or spend too much money. If you have questions or would like to discuss these ideas, please contact us at financialplanning@bfsg.com.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

College Cost Data for 2022-2023 School Year

Every year, the College Board releases new college cost data and trends in its annual report. The figures published are average cost figures based on a survey of approximately 4,000 colleges across the country.

Over the past 20 years, the average price for tuition, fees, and room and board has increased 46% at public colleges and 30% at private colleges over and above increases in the Consumer Price Index, straining the budget of many families and leading to widespread student debt.

Here are cost highlights for the 2022-2023 year. This year, public colleges have done a better job than private colleges at keeping tuition and fee increases under 2.3%. Note: “Total cost of attendance” includes direct billed costs for tuition, fees, and room and board, plus indirect costs for books, transportation, and personal expenses.

Public colleges: in-state students

  • Tuition and fees increased 1.8% to $10,940
  • Room and board increased 3.0% to $12,310
  • Average total cost of attendance: $27,940

Public colleges: out-of-state students

  • Tuition and fees increased 2.2% to $28,240
  • Room and board increased 3.0% to $12,310 (same as in-state)
  • Average total cost of attendance: $45,240

Private colleges

  • Tuition and fees increased 3.5% to $39,400
  • Room and board increased 3.0% to $14,030
  • Average total cost of attendance: $57,570

Note: Many private colleges are at or approaching $80,000 per year in total costs.

Sticker price vs. net price

The College Board’s cost figures are based on published college sticker prices. But many families don’t pay the full sticker price. A net price calculator, available on every college website, can help families see beyond a college’s sticker price. It can be a very useful tool for students who are currently researching and/or applying to colleges.

A net price calculator provides an estimate of how much grant aid a student might be eligible for at a particular college based on the student’s financial information and academic record, giving families an estimate of what their out-of-pocket cost — or net price — will be. The results aren’t a guarantee of grant aid, but they are meant to give as accurate a picture as possible.

FASFA for 2023-2024 year opened on October 1

Even though the college cost data contained here is for the 2022-2023 school year, it’s already time to think about the following year. The Free Application for Federal Student Aid (FAFSA) for the 2023-2024 year opened on October 1. It’s important to keep in mind that the 2023-2024 FAFSA will factor in your income information from two years prior, which it will get from your 2021 federal income tax return, but it uses current asset information. Your income is the biggest factor in determining financial aid eligibility.

Check out our recent webinar, “College Planning: How to Afford the College of Your Dreams”, where we discuss how to apply for FAFSA and how to negotiate the best possible financial aid packages.

Prepared by Broadridge. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Student Loan Repayment Delayed Again to Future Date in 2023

The Biden administration has announced another extension for repayment of federal student loans to an unspecified date in 2023 due to legal challenges that have blocked implementation of the student loan debt relief program. The previous payment moratorium was set to expire on December 31, 2022.

Under the new extension, student loan payments will resume 60 days after the student loan debt relief program is implemented or the lawsuits are resolved. If the courts have not resolved the issue by June 30, 2023, payments will start 60 days after that.

Legal challenges bring uncertainty

The latest extension is in response to court rulings that have blocked implementation of the student loan forgiveness program. Under that plan, announced in August 2022, federal student loan borrowers — including graduate students and parents with PLUS Loans — with an adjusted gross income under $125,000 ($250,000 for married couples filing jointly) are eligible for $10,000 in loan forgiveness, with Pell Grant recipients eligible for up to $20,000 in debt relief.

In November, a federal judge in Texas ruled that the student loan forgiveness program was unlawful. And in a separate lawsuit, a federal appeals court issued an injunction against the program on behalf of six states — Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina — effectively stopping the Department of Education from accepting more applications and discharging any debt.

The Biden administration asked the Supreme Court to review the lower court rulings during its current term, and the Supreme Court has agreed to hear the case, with arguments tentatively scheduled for February 2023. In the meantime, the Supreme Court left the injunction blocking the program in place.

Pandemic-era payment pause continues

There have been nine student loan payment pauses since the start of the coronavirus pandemic. The first pause came in March 2020 when Congress passed the Coronavirus Aid, Relief, and Economic Security Act. Subsequent payment extensions have come via Presidential executive orders. The latest extension, most likely sometime after June 2023, will bring the total payment pause to over three years.

Over 45 million Americans owe a collective $1.6 trillion in federal student loans, the largest category of consumer debt behind mortgages.1 To date, more than 26 million people have applied for debt relief under the program; an additional 8 million people who have their income information already on file will qualify automatically for the program.2

Sources:

  1. The New York Times, November 22, 2022
  2. The Washington Post, November 14, 2022

Prepared by Broadridge. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Best Account to Open for Your Kids Future

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

As parents we always want to see our kids succeed and do better than we did. This means many times we want to invest in their future for various things. Most of the time parents want to save for education, but there could be other reasons to save.  For example, helping them buy their first home, seed money to start their business venture, or to pay for a wedding. Below are the most common account types and when it may be the best choice based on your goals for the money. Some may notice that the Coverdell (Educational IRA) is not listed and that is because it is no longer relevant given recent changes to the 529 Plan.

529 Plan: Best account for saving for education

  • Best used if you 100% know that the beneficiary is going to use the funds for college, post-secondary education, or private school.
  • For 2022, the max that can be contributed in one year is $16,000 per person per beneficiary (or $32,000 with gift splitting).  There is also an option to superfund a 529 where 5 years of contributions are made in one year.
  • Contributions grow tax-free and distributions can be tax-free as long as they are used for qualified education expenses.  Qualified education expenses include (but are not limited to) items like room and board, tuition, and books.
  • Contributions can be deductible at the state level depending on your state.
  • If the distribution is not for qualified education expenses, the earnings on the distribution are subjected to ordinary income taxes and a 10% withdrawal penalty.
  • You can switch the beneficiary at any time. Let’s assume you have money left over after the oldest child graduates; you can transfer this money to the next kid in college.

UTMA/UGMA (custodial account): Best account if you want your kid to have the money at 18 or 21 without any limitations

  • In 2022, this is an account where the custodian can contribute $16,000 per year to an investment account for a minor child.  At the age or majority (usually age 18 but can be increased to age 21 or 25 in some circumstances), the minor child then becomes the owner of the account.
  • While the minor child is still listed on the UTMA (Uniform Transfer to Minors Act) account or UGMA (Uniform Gift to Minors Act) account, the earnings are subject to capital gains at the following schedule:
    • The first $1,100 of unearned income is free from tax,
    • The next $1,100 is taxed at the minor’s tax rate,
    • Earnings above $2,200 are taxed at the parent’s tax rate.
  • When the account transfers to the minor child due to the minor child reaching the age of majority, earnings and distributions are taxed at capital gains tax rates.

2. Put money into a taxable account in your nameBest option for anything not education specific

  • There are no limits on how much you put into the account or how the money is used.
  • You maintain full control of the assets and determine when and how much they receive.
  • This is a taxable account, so it would be subject to regular taxes (i.e., interest income, capital gains, dividends, etc.)
  • If your kid(s) were to inherit the taxable account, the securities in the taxable account get a step up in basis to virtually eliminate any tax implications for them.
  • A taxable account has less impact on financial aid for your kid(s) than a UTMA/UGMA.
  • Money can be invested however you choose.
  • When you give the money to them it is considered a gift and limited to $16,000 per person or $32,000 for a married couple per year (2022). Any amount over this is reported on a gift tax return (no taxes are paid but it reduces your estate tax exemption).
  • If the money is used to pay tuition for a school directly or directly to medical bills, then the $16,000 limit does not apply.

Roth IRA: Best if saving for their retirement

  • Contributions to a Roth IRA can be made for a minor child as long as the minor child has earned income from working.
  • For 2022, contributions are limited to $6,000 or the amount of earned income (whichever is lower). Assume they make $3,000 from a summer job, then you are limited to contributing $3,000.
  • A parent can put money into the Roth IRA for the kids to allow the kids to keep their income they earned.
  • Contributions grow tax-free and distributions can be tax-free if the owner (the minor child) is at least age 59.5 and the contributions have been in the account for at least 5 years.  If not, earnings on the distributions are subject to ordinary income tax and subject to a 10% early withdrawal penalty.  There are some instances where the 10% early withdrawal penalty can be waived that include (but are not limited to): buying your first home (up to $10k), college tuition, or permanent disability.

As you can see, there are many options available to you and the best account depends on what your goals are. You can reach us at financialplanning@bfsg.com if you would like to have a complimentary call to discuss your specific situation.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

October is the Kickoff Month for Financial Aid

October is the kickoff month for financial aid. That’s when incoming and returning college students can start filing the Free Application for Federal Student Aid (FAFSA) for the next academic year. The FAFSA is a prerequisite for federal student loans, grants, and work-study, and may be required by colleges before they distribute their own institutional aid to students.

How do I submit the FAFSA?     

The FAFSA for the 2023-2024 school year opens on October 1, 2022. Here are some tips for filing it.

  • The fastest and easiest way to submit the FAFSA is online at studentaid.gov. The site contains resources and tools to help you complete the form, including a list of the documents and information you’ll need to file it. The online FAFSA allows your tax data to be directly imported from the IRS, which speeds up the overall process and reduces errors. The FAFSA can also be filed in paper form, but it will take much longer for the government to process it.
  • Before you file the FAFSA online, you and your child will each need to obtain an FSA ID (federal student aid ID), which you can also do online by following the instructions. Once you have an FSA ID, you can use the same one each year.
  • You don’t need to complete the FAFSA in October, but it’s a good idea to file it as early as possible in the fall. This is because some federal aid programs operate on a first-come, first-served basis. Colleges typically have a priority filing date for both incoming and returning students; the priority filing date can be found in the financial aid section of a college’s website. You should submit the FAFSA before that date.
  • Students must submit the FAFSA every year to be eligible for financial aid (along with any other college-specific financial aid form that may be required, such as the CSS Profile). Any colleges you list on the FAFSA will also get a copy of the report.
  • There is no cost to submit the FAFSA.

How does the FAFSA calculate financial need?

The FAFSA looks at a family’s income, assets, and household information to calculate a family’s financial need. This figure is known as the expected family contribution, or EFC. All financial aid packages are built around this number.

When counting income, the FAFSA uses information in your tax return from two years earlier. This year is often referred to as the “base year” or the “prior-prior year.” For example, the 2023-2024 FAFSA will use income information in your 2021 tax return, so 2021 would be the base year or prior-prior year.

When counting assets, the FAFSA uses the current value of your and your child’s assets. Some assets are not counted and do not need to be listed on the FAFSA. These include home equity in a primary residence, retirement accounts (e.g., 401k, IRA), annuities, and cash-value life insurance. Student assets are weighted more heavily than parent assets; students must contribute 20% of their assets vs. 5.6% for parents.

Your EFC remains constant, no matter which college your child attends. The difference between your EFC and a college’s cost of attendance equals your child’s financial need. Your child’s financial need will be different at every school.

After your EFC is calculated, the financial aid administrator at your child’s school will attempt to craft an aid package to meet your child’s financial need by offering a combination of loans, grants, scholarships, and work-study. Keep in mind that colleges are not obligated to meet 100% of your child’s financial need. If they don’t, you are responsible for paying the difference. Colleges often advertise on their website and brochures whether they meet “100% of demonstrated need.”

Should I file the FAFSA even if my child is unlikely to qualify for aid?

Yes, probably. There are two good reasons to submit the FAFSA even if you don’t expect your child to qualify for need-based aid.

First, all students attending college at least half time are eligible for unsubsidized federal student loans, regardless of financial need or income level. (“Unsubsidized” means the borrower, rather than the federal government, pays the interest that accrues during school, the grace period, and any deferment periods after graduation.) If you want your child to be eligible for this federal loan, you’ll need to submit the FAFSA. But don’t worry, your child won’t be locked in to taking out the loan. If you submit the FAFSA and then decide your child doesn’t need the student loan, your child can decline it through the college’s financial aid portal before the start of the school year.

Second, colleges typically require the FAFSA when distributing their own need-based aid, and in some cases as a prerequisite for merit aid. So, filing the FAFSA can give your child the broadest opportunity to be eligible for college-based aid. Similarly, many private scholarship sources may want to see the results of the FAFSA.

Changes are coming to next year’s FAFSA

Changes are coming to the 2024-2025 FAFSA, which will be available October 1, 2023. These changes are being implemented a year later than originally planned. One notable modification is the term “expected family contribution,” or EFC, will be replaced by “student aid index,” or SAI, to better reflect what this number is supposed to represent — a measure of aid eligibility and not a definite amount of what families will pay. Other important changes are that parents with multiple children in college at the same time will no longer receive a discount in the form of a divided SAI; income protection allowances for both parents and students will be increased; and cash support to students and other types of income will no longer have to be reported on the FAFSA, including funds from a grandparent-owned 529 plan.

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.