Crunching the financial aid numbers can be pretty disheartening. Families who think they can afford to pay $5,000 toward college expenses may find out they are expected to pay $15,000, $20,000 or more.
But there is a silver lining for those expected to pay full freight. If you are one of them, you are free to consider a wider variety of options for managing college costs without worrying about their impact on financial aid. Here are some of the possibilities:
* Go for "merit" money.
Private colleges in particular like having a healthy percentage of students whose parents can afford to pay their way. If it takes a modest scholarship to get one of these students, many colleges are prepared to offer one. Ask - and fill out the financial aid forms even though you know you won't be considered needy.
* Buy a prepaid tuition plan.
Although rising tuition costs could put the future of the Florida Prepaid College Plan in jeopardy, many people are betting that the Legislature will protect the benefits of students who already own prepaid plans. The next enrollment period is Nov. 3 to Jan. 30. Prices have not been set. The Florida plan can be used at public and private colleges in state, although the benefit amount is based on public tuition. A dormitory plan also is available. A consortium of more than 200 private college is creating a national prepaid tuition plan, the Independent 529 Plan. It will allow the purchase of certificates good for future tuition at member colleges.
* Stash money in your child's name.
Once a child turns 14, investment income is taxed at the child's rate rather than the parents'. This can result in considerable tax savings over the years, especially if you have appreciated stock. You can give it to the child, who then pays capital gains taxes at his or her own rate. This approach requires opening a Uniform Transfer to Minors Act (UTMA) account for children younger than 18. If you like, you can title the account so you have control until the child turns 21. Each parent and grandparent can give a child $11,000 a year without gift-tax consequences. The drawback is that the child eventually controls the money.
* Emancipate your college student.
Upper-income families willing to trade control for tax benefits can stop claiming college students as dependents on their income tax returns. That allows the student to claim the Hope Scholarship Credit or the Lifetime Learning Credit, as well as the personal exemption, which upper-income parents lose anyway. The two education credits start phasing out when joint adjusted gross income exceeds $83,000, while personal exemptions phase out above $209,250.
To qualify as independent, children must provide more than half their own support. They can spend the assets their parents or grandparents have given them over the years in addition to their own earned income. Consult a tax adviser before trying this strategy.
Forget about emancipating a college student to qualify for need-based financial aid. With few exceptions, single undergraduate students cannot be considered independent until they turn 24.
*Tap the grandparents
If you are fortunate enough to have generous older relatives, try convincing them to reduce the size of their estates. If they stash the money in a 529 savings plan, the law allows them to set aside $55,000 ($110,000 for a couple) by using five years' worth of gift-tax exemptions at once. That's not enough? Grandparents, or anyone else, can give even more by writing tuition checks directly to the college on the child's behalf. The amount will not count as part of the $11,000 annual gift-tax exemption.
