The following is a presentation prepared for NASFAAs 2006 Conference in Seattle, WA July 58, 2006

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The following is a presentation prepared for
NASFAAs 2006 Conference in Seattle, WAJuly 5-8,
2006
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College Financial Planners and Financial Aid - Do
They Have a Role to Play?
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Presenters

• John Pearson, CPA, CCPS
• Tax and Educational Strategies
• Norwalk, Connecticut
• Mick Endersbe, CHFC, MS
• President
• College Planning University, LLC
• Lakeville, Minnesota

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Apply Here For YourTax Scholarship!!
John Pearson, CPA, CCPSTax and Education
Strategies17 Pumpkin Lane Norwalk, CT
06851 203-984-2518 www.taxscholarship.net
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Todays Goal

• Not to retread paths of student loans and
  government grants
• No 529 savings plans
• Not to game the financial aid system
• Not to search for obscure scholarships
• Seek practical solutions using tax, debt,
  consultative, and cash flow management to reduce
  the after-tax cost of college

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Warm-up Quiz

• Desirable student with significant financial need
  applies to six colleges, with two top choices.
• School A offers her a full scholarship for
  tuition and feesher other top choice offers her
  that leaves a nearly identical COA for family
  to fund.
• She declines School As offer in favor of
  School B on a financial basis. Her parents
  state that even though the net COA were almost
  exactly the same, School As offer would have
  cost them 6,000-7,000 more!!
• How could this be?

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Which of these student expenses are federal
income tax deductible?

• Music lessons
• SAT preparation courses
• Sports training
• Student abroad travel
• Educational consultant fees
• Weddings
• Tutoring
• Technology (computers, cell phones, etc.)

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What is this building?
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Important Terms

• Adjusted Gross Income
• Tax Deduction
• Tax Credit
• Exemption
• Standard Deduction
• Alternative Minimum Tax
• Education Tax Incentives
• Tax Bracket

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Current Tax Incentives For Education

• Scholarship Exclusion
• Educational reimbursement plan
• 529/Prepaid tuition plan
• Student loan interest deduction
• Tuition deduction (expiring)
• Hope and Lifetime Learning Credit

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So Who Are We Talking About?

• Middle and upper middle class America
• Living in areas w/ above average cost of living
  and median incomes
• The house rich/cash poor who dont get need
  based aid

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And What Are Their Problems?

• College prices rising beyond inflation rate
• Parents have saved little if anything
• Parents already have high debt levels
• Students facing debt from college/credit cards
• Graduation rates are extending

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As If That Werent Enough!

• Rising energy and health care cost
• Beginning of demographic shift of jobs to Asia
• Tax incentives for education are inadequate
• Education cost is shooting holes in Boomers
  biggest goal... Retirement

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So How Are The Boomers Doing It?

• Paying out of cash flow
• Using up savings/reducing retirement
  contributions
• Obtaining scholarships
• Going to the grandparents
• Students are working more hours
• But mostly, both parents and students are
  borrowing

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To Pay For One Childs College, You Need To Earn
For 5 Years of Average Public University 111,000
For 4 Years of Average Private
University 190,000
Assumes 28 bracket Federal and 5 State
Tax The average annual cost of year public
college is 13,800, Private university is 29,500
Source Harris Insight Funds
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How paying for education impacts retirement

• Assume parents age 44, children 18 and 14, both
  attending private college 4 years
• Initial cost is 25,000 after aid, 5 inflation
• Assets invested at 8 compound
• At age 65, parents retirement pool is
• reduced by

846,426
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And what if those children attend private high
school

• Parents begin at age 40 with students 14 and 10,
  both attend private school beginning in grade 9.
• Annual Cost is 20,000, 5 inflation
• 8 investment assumption
• Private college follows at 5 inflation
• Retirement savings would decline at age 65 by

1,767,668
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An EFC Scenario

• AGI of 76,000
• Wages 75K (Wife earns 50K, Husband 25K)
• Parents have 30K in cash/savings
• Kids are 18 and 14
• Older child has 3K of summer earnings, 5K
  assets
• Younger child has 5K of assets
• 150K of home equity
• Claimed the Hope Credit of 1500

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And the EFC is?

• Under the Federal Methodology the parents EFC is
  12,304
• Under the Institutional Methodology the parents
  EFC is 14,917
• Source College Board Online Financial Aid
  Estimator

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Adding Some Wages

• If AGI bumps to 101,000
• Wages split 75,000/25,000
• Everything else stays the same
• EFC jumps to 22,567/22,544
• AGI at 126,000 (Split 75,000/50,000)
• EFC becomes 33,278/31,998
• Source College Board Online Financial Aid
  Estimator

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Shifting and Gifting

• Shifting
• Move earned income from the parent to the child
• Best done if family has a family business or farm
• Taxed in a lower bracket of the child
• Gifting
• Use appreciated assets like stock
• Student uses stock sale proceeds to pay for
  college
• Gains taxed at lower bracket

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Its time to pay for private school.
Private School Years Tax deductions 5,000
standard deduction

• Parents
• personal assets
• compensation
• from business

• Child is taxed on
• Earned income
• Unearned income

Child
Gift assets and/or pay child
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Private High School
Childs Earned Income 5,000 Childs Std.
Deduction (5,000) Federal Tax due
0
Parents Tax Savings Earned Income 5,000 33
fed/state tax rate 1,650 Tax that parents
avoided 1,650
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Private High School Tax Savings
Income shifted 5,000/year Four
years 20,000 Childs Tax
0 Parents Tax Avoided 6,600
(1,650/yr/4yrs)
Tax savings 8 return 7,500
(1,650/yr/4yrs/_at_8) At End of College
10,200
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The Reality of Paying for College

• At AGI of 130,000 (joint return)
• No Hope Credit
• No Lifetime Learning Credit
• No Need-Based Financial Aid (rare exceptions)

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Enter the Tax Scholarship

• Direct wages from family business to child
• Transfer appreciated property to child
• Total should be enough to have child provide more
  than ½ their own support

Result Student gets exemption, education credits
and their own standard deduction!!!
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Example College Years 1-2

• Student selects private college - 33,000 cost
• Parents pay child 13,000 out of family business
  for office and marketing work
• Gift 22,000 of low-basis stock to child
• Child uses cash to pay for college
• If not transferred to child, parents federal tax
  on all this income approx 6,500
• Childs tax on the same income is 0

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In College Years 3 and 4

• Give student a raise to 17,000 of wages
• Transfer stock to the child as before
• Parents tax burden if income was left with them
  would be 7,500
• Childs tax? 0

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Tax Scholarship Summary

• Total college tax savings per child? 28,000
• If student attended private school, per my
  example 6,600 additional saved
• If invested, total savings total approximately
  40,000.per child

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Should I restructure mortgage?

• Real estate market in region is slowing
• Is paying down your mortgage such a great idea in
  this environment if you are cash poor?
• What are you earning on the paydown?

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Why Cant I Just Borrow Against My House?

• Beware The AMT!!

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Common Questions

• If my child isnt my dependent, are they no
  longer covered under my benefits?
• In your example, you didnt include state taxes
  on the child, and what about Social Security
  Taxes?

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Common Questions

• What kind of work could my child possibly do to
  justify such a large wage?
• What other things could I pay for using this
  concept?

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Getting The Word Out

• Public relations-national and local media
• Local, regional and national seminars
• Making contacts at independent schools
• Developing relationships with the Financial Aid
  and Admissions community
• Asking colleges and universities to consider
  providing this kind of educationto parents!!
• Parent enrichment at orientation or scheduled
  high school visit days
• High Schools are off limits due to non-profit
  rules.

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Why should we bother?

• Marketing value is tremendous
• Existing clients appreciate the value added
• Potential new clients have never heard these type
  of ideas..from anyone
• Even if they dont act on them, they appreciate
  being told that they have choices!!
• If they do act on them, made the education more
  affordable!!

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What are your questions?
John F. Pearson CPA CCPS Tax and Educational
Strategies 17 Pumpkin Lane Norwalk, Connecticut
06851 203-984-2518 www.johnpearsoncpa.com

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Presenter

• Mick Endersbe, CHFC, MS
• President
• College Planning University, LLC
• Lakeville, Minnesota

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Traditional College Planning

• Data-based assumptions are made
• Time Frames
• Risk Tolerance
• Rate of Return
• Inflation
• Savings vehicle

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The Problem with Data - Inflation

• In each of the past four years, tuition has
  increased by 10 percent or more.
• Minnesota State Colleges and Universities News
  Release, October 20, 2004
• The Minnesota State Colleges and Universities
  Board of Trustees has capped tuition increases at
  7 percent in the coming year. The decision comes
  after the trustees endured a barrage of student
  complaints about rising college costs during
  recent budget discussions. The cap is a hardship
  for at least 20 of the system's institutions that
  have already budgeted for tuition increases
  higher than that.
• Minnesota Public Radio, July 21, 2005

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The Problem with Data Rate of Return
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The Problem with Data - Saving
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The Problem with Data My Family
Childs Name Carley Libbey Age 9 9 Years
until college 9 9 Current college
cost 27,969 27,969 Current savings 10,000 1
0,000 Assumed rate/return 9 9 Assumed
inflation rate 7 7 Current monthly
savings 500 500 Additl monthly
needed 797 797
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The Problem with Data Moving targets
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The Problem with Data Well go public.

• Family Scenario
• College University of MN TC 16,344
• Income 70,000
• Assets (home and IRA NA) 50,000
• Number of Children 2
• Ages 17 14
• EFC 9,375
• State Grant 0
• Pell Grant 0
• Stafford Loan 2,625
• Parent Responsibility 13,719
• x 4 years over 55,000

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A Sample Client - Executive

• 340,000 annual income
• 600,000 in investments
• 300,000 in home equity
• 48 years old
• 4 talented, hardworking kids
• Wants his kids to have the opportunity to attend
  Elite schools
• The elite colleges are running about 44,000 per
  year. How did you plan to pay for college?
  Thats why youre here.

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Tell me about Sara

• Is there a particular school that you or Sara
  are interested in? Why?
• How did you think you would pay for XYZ?
• Well, weve done some.. 60,000
• We were hoping we would get some help from the
  college.
• Shes a B plus student with a 29 on her ACT,
  debater
• Would you send her if she didnt get aid?
• Because she wont - nor will any of the
  executives kids

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Our Solution
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Real College Financial Planning

• Done in the context of overall financial planning
• Complex, moving parts
• Investment expertise
• Tax expertise
• Financial aid expertise?
• Like all consultants, must be skilled at asking
  questions.

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Do you want their involvement?If so, what would
you like them to do?
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