Families Paying for College

The cost of a college education is rising, and financial aid calculations may ask you to contribute more than you can realistically afford.

Watching your child grow up into an adaptable, responsible teen is one of life's most gratifying experiences-unless you're distracted by the prospect of paying for a pricey college education. If your child is in high school or close to it, start strategizing now to head off the unpleasant surprises later.

Estimated financial contribution

Like most parents, you're probably hopeful about obtaining financial aid to fund your child's college education. Because of the complexities of the financial aid calculations, however, it's impossible to guess what amount of aid might be available to your family based on your income alone-even if you're just barely scraping by. The financial aid formula considers your income and asset levels, as well as the nature of your assets, to determine how much you must contribute each year to cover those education-related expenses. On top of your liability, your child is also expected to contribute. Combined, these two amounts make up your household's estimated financial contribution.

According to CollegeAnswer.com, the maximum income amount that qualifies for an automatic zero contribution is $15,000. Therefore, if you and your spouse earn more than $15,000 annually in adjusted gross income, you can expect to contribute to your child's education.

Managing your contribution

If your young one has already entered high school, it's time to start planning. Visit CollegeAnswer.com or FinAid.com, and use the EFC calculators; they'll tell you roughly how much you're expected to contribute based on your current financial situation. Don't panic if the contribution amount surprises you; you may still have time to manage it. Here are some reasons why:

• Assets in the student's name generally reduce financial aid eligibility to a greater degree than assets in the parent's name. You can't legally take these assets back from your child, but you may be able to transfer them into a custodial 529 plan. It may also make sense to spend some of those funds for the benefit of your child. Talk to your accountant to clarify the restrictions and consequences of either strategy before proceeding. If you're still saving, stash the money in your own name from this point forward.
• Your student is expected to contribute a greater percentage of her income than you are. Avoid putting your youngster on the payroll in the family business during the tax year prior to the student's high school graduation.
• Credit card debt and auto loans in your name aren't considered as factors in the needs analysis. You could, therefore, increase eligibility by using your available cash to pay off these debts. Mortgage debt is a factor, however, because the mortgage loan balance reduces your total assets.

You want to be proud-not depressed-about sending your kid off to college. Make it easier on yourself by starting the planning process now.