WALKING THE WALK: MY FINANCIAL AID PROGRESS SO FAR

In the last few weeks, I have talked about applying for scholarships (and offered some tips and tricks that can be used in the process) and pleaded with you all to run immediately to your computers and fill out your FAFSAs. It occurred to me that these things were pretty easy to write about but that I had actually done neither in a while: a few months for the FAFSA; many years for scholarships. So, I fetched (bought actually, at my favorite coffee shop with the sparkly-eyed barista) a cup of coffee and approached my laptop, knuckles cracked and appropriately caffeinated.

I began with the FAFSA. As a returning student for the 2021-2022 school year, I was able to log in (www.FAFSA.ed.gov) using my same information from last year. It was handy that I kept my log-in information and PIN because the system was then able to autofill a large portion of my form. I, therefore, highly recommend that you all keep your FAFSA information in a safe, place as you create it or remind yourself of it. You’ll likely need for at least a couple more years.

As I went through the process, screen by screen, I was asked to input new or verify existing information pertaining largely to my income, tax status and assets. There were several screens (I believe 10, in all), each of which had to be completed and saved before I was allowed to move on to the next page. This part was a little frustrating because I didn’t know exactly what information I would need as I moved along, but it was nothing earth-shattering.

In the interest of disclosure, I have not yet filed my tax return for 2020. In fact, like most people I imagine, I do not even have most of my 1099s and W-2s, yet. So I looked at the most recent information I had (account transaction histories and YTD information on my last paystubs), along with last year’s tax returns, and guesstimated. The whole process from log-in to submission took less than half an hour. Once I file my returns, I will have to log back on to the system and update the information so that it is accurate, but my school and the federal government now have something on which to base their consideration of my award levels for 2021-22.

Scholarship Applications

Pumped with my success in the FAFSA submission realm, I plowed right into the scholarship application. Time for a little more disclosure. I am a returning student. I already have an undergraduate and a graduate degree. I am currently attending a public community college in order to sharpen some skills. Ultimately, I will just transfer these credits to my alma mater and end up with another bachelors degree. I am not exactly scholarship material. Moreover, the school is (frankly) dirt cheap. So, I am not going to go out of my way to apply (and compete with students who need them much more) for outside scholarships.

That being said, my community college does offer an all-in-one, online application to apply for all the scholarships it offers to students, including those with profiles similar to mine. Being frugal, I don’t feel too bad about throwing my hat in the ring for these scholarships so I sat down to apply. I found out about these school-sponsored scholarships through a postcard I received in the mail. The postcard told me that the application process opened up on January 2, and that the deadline was April 1. It also told me that I could apply by going to the financial aid page of the college website and clicking the “Scholarship Opportunities” link. Even with all this guidance, it took me nearly five minutes to find the link and get to the application. Once there, I was asked for more information than the FAFSA asked me for, plus I had to write two 500-word essays, which I was not prepared to do upon signing in. So I saved what I could and logged out to think about the essays.

After I came up with some good information (following my own advice from earlier posts), I logged back in. My “saved” information wasn’t there. I had to re-enter everything. Many questions asked about community service, leadership and volunteer work I had done. I then typed in my essays, which asked the following:

“Describe yourself, including what you have accomplished that makes you most proud, what you want to accomplish at Normandale, how scholarship support is important to your future, how your work and/or volunteer experiences have contributed to making you the person you are today and why you should be considered for a scholarship.”; and

 

“Describe a significant event in your life and how it has influenced your personal growth and professional goals.”

I felt comfortable with my answers to the questions and generally happy with the way the scholarship application went. It did, however, take almost three hours of my time, all told; which is a lot for a scholarship that I am likely not even going to get! But, once again following my own advice, I applied. I provided thoughtful, thorough answers. So, I can’t say that I didn’t do my part. We’ll just have to see.

I realize that my experience was very personalized. Yours will be, too. I think there are a few things here that you can take away and use, though. First, whether it’s the FAFSA or a scholarship, apply early. Don’t wait until the last minute: give your application early and maximum exposure before aid officers and committee members are all in a frenzied rush (or worse, funds have already been doled out). Some schools, in fact, may require a FAFSA before they look at a scholarship application. Second, the online FAFSA is not painful, especially for returning students. So just do it. Third, and perhaps most important, you may have to dig for your school’s scholarship opportunities. Even my community college, which sent out a postcard — and let’s remember, I write a blog on this subject, so I like to think I’m a little more dialed-in than your average student on issues of financial aid — did not make it easy to find the application. If your school is even less user friendly, you will have to do some leg work. Google your school’s name and “scholarship”. Call your financial aid adviser, or drop by her office and ask about scholarships. Some schools or foundations may not even have electronic applications yet. Most importantly, none of this will happen unless you do it. Contrary to popular belief, there are no financial aid fairies.…

SECTION 529 PLANS AND YOUR TAXES

In other posts on this site, and elsewhere on the Web, you’ve likely heard about the tax advantages offered by Section 529 savings and prepaid tuition plans. What I have noticed though is that few sites (once again, including this one) delve very deeply onto exactly what those benefits are.
taxes
In this post, we’ll take a look at how using a 529 plan for college can be tax beneficial to you. Having said that, here’s the CY– mine, actually –A statement: I am not a tax expert, adviser or financial planner. This post is simply a compendium of public information that I’ve managed to pull together. Talk to your own accountant or financial planner to see how a section 529 savings plan affects your own situation. Capice? Good.

Federal Taxes

The biggest advantage a section 529 to a taxpayer on her federal return is the ability to withdraw all the gains in the account without paying any taxes on the accumulated earnings — as long as they are used for qualified college expenses. This means that if you put $5,000 into a 529 plan over the years, and its value has grown to $15,000, you will not pay federal taxes on that $10,000 gain when you use the money for the account beneficiary’s eligible college expenses. That is kind of a big deal.

While the range of 529 eligible expenses is relatively small, each category is broad enough to not be too restrictive. As I noted in an earlier post, section 529 eligible expenses include:

– Tuition and Fees
– Books
– Room and Board, for students enrolled half-time or more
– Equipment and supplies required for enrollment
– Computer equipment and supplies

One caution is that, for purposes of the tax exclusion, your section 529 withdrawal is the last source the IRS will look at. So, let’s say your educational costs total $10,000 for one year, and you receive $3,000 in scholarships and another $3,000 in grants. This leaves a $4,000 difference between the aid you received an your educational expenses. The IRS will only allow you to withdraw $4,000 from your 529 plan without incurring a tax. This is because it will take all other forms of aid the student receives into consideration first — only your actual, out of pocket expenditures can be withdrawn tax-free from a 529 plan. The interplay between 529 accounts and financial aid can be delicate.

State Taxes

Many people can reap additional tax advantages from their section 529 savings plans based solely on geography. This is because of the way in which section 529 plans differ from state to state, as well as the disparate ways in which they are treated by each state’s taxing authority.

Let’s use two upper-Midwest states that are home to legacy (i.e., real) Big Ten universities as an example. The Twin Cities of Minneapolis and St. Paul are home to the University of Minnesota and the hub of a metropolitan area that includes part of western Wisconsin. If your family lives in western Wisconsin, and your student attends the University of Minnesota, about 30 minutes from home (instead of the University of Wisconsin at Madison, located nearly 200 miles to the east), you have a huge tax advantage over Minnesota residents who live 5 minutes closer to school. Wisconsin will allow you to deduct a sizable sum (recently as much as $6,000) for college tuition and any mandatory fees from your state taxes. This deduction applies to each student in your household, who is attending school in either Minnesota or Wisconsin. Moreover, the two states have a reciprocity agreement, so students pay state resident rates at public colleges in either state. The state tax deduction for tuition for a Minnesota family: $0. Nothing. Nada.

To add insult to injury, Wisconsin, along with more than 30 other states and the District of Columbia, will allow you to deduct 529 plan contributions on your state tax return. Limits have recently been as much as $3,000 per child per year. So, a student from Hudson, Wisconsin, can attend the University of Minnesota with a friend who lives a mile away in Afton, Minnesota. They will pay the same amount of tuition. But the Wisconsin family will have been able to deduct up to $3,000 per year for contributions it made to its student’s section 529 plan. In addition, another $6,000 or so in deductions can be claimed for tuition paid to the University of Minnesota. The Wisconsin student’s family was able to deduct several thousand dollars per year saving and paying for college in Minnesota. Her friend’s family over in Afton? Not a cent. It is vastly more expensive for a Minnesota family to save and send their child to school at the U of MN than its is for a Wisconsin family to do the same.

The take away from this example is to be mindful of your state’s tax rules with respect to tuition and section 529 tax benefits. This can make a big difference in the value of the section 529 plan to your specific situation. Talk to your tax adviser and try to carve out a savings strategy that makes sense for you.…

FINANCIAL AID IMPLICATIONS OF SECTION 529 PLANS

The savings and prepaid tuition plans authorized by section 529 of the Internal Revenue Code (usually called 529 — or section 529 — plans) can be a great tool for college savings. They offer a handful of solid choices for investing your funds, usually provide a decent return (especially under the prepaid tuition model) and are unparalleled among other college savings options when it comes to tax advantages. In spite of all the advantages a 529 college savings plan can offer, a family who still needs or hopes to receive some form of financial aid must plan their use of a 529 account wisely. The amount in and the ownership of a section 529 has a direct impact on the amount of aid a student is eligible to receive.

Use 529 College Savings Accounts First
529
As good as it felt to squirrel away all that money for college, if you didn’t save enough tough to cover all four years, use it up first. In most cases, 529 accounts are owned by parents for the benefit of their children. This means that they are accounted against aid eligibility at a rate of just under 6 percent. If you spend it all in the first year, it won’t be there to count against aid eligibility over the next years of college.

The problem you run into with a 529 account and other aid is that if you do receive some form aid, such as a scholarship, you are only able to withdraw the difference between the aid and the actual college expenses. Otherwise you get hit with a tax penalty, which flies in the face of the whole idea behind the accounts.

In order to qualify for a tax-free withdrawal, you have to use your 529 savings at a school that is otherwise eligible to receive federal financial aid funds. You can only spend the money in one of the following expense categories:

– Tuition and Fees
– Books
– Room and Board, for students enrolled half-time or more
– Equipment and supplies required for enrollment
– Computer equipment and supplies

Thus, if you have it, spend it.

Or Use 529 College Savings Accounts Last

One effective way to minimize how a 529 account affects financial aid eligibility is to make sure they are owned by neither the student nor her parents. So, for example, if a grandparent is the account holder on behalf of the student beneficiary, the 529 account will have no effect whatsoever on aid eligibility. In the eyes of FAFSA and the expected family contribution calculation (EFC), it’s as though the 529 account doesn’t exist. Which is great… until you want to use it. Once a grandma makes a withdrawal to pay for Junior’s college tuition, the money taken from the 529 savings plan becomes income attributable to the student. This is not good.

Student income is the asset that is most heavily weighed against financial aid in the EFC calculation. After an allowance of around $6,000, fully half of anything a student makes is expected to go toward college expenses. So, grandma’s good will becomes a bit of a thorn in Junior’s financial aid side.

If the grandparent-owned 529 plan is not enough to cover all four (or however many) years of college, then you should not tap into the funds until AFTER you have submitted your FAFSA for the last year of school. In this way, the student will receive the fullest consideration for financial aid, as well as the greatest benefit of his grandparents’ generosity.

For parents, or in some cases students themselves, who have already set up a 529 savings plan, it may be possible to change the plan’s ownership. You have to do so before the beneficiary is of college age and begins school. Moreover, you absolutely, positively, should not change the ownership of your 529 savings account without talking to the plan administrator and your own financial advisor. The potential ugly tax consequences of getting it wrong far outweigh any benefits you would gain from an additional 6 percent of eligibility toward financial aid.…