Key college planning dos and don'ts

Small business owners - like all parents planning for college - need to pay special attention to FAFSA rules regarding the Expected Family Contribution. The higher your EFC, the more you end up paying. That's why all families should heed these baseline guidelines:

Don't save in a student's name

For EFC purposes, savings in a parent's name - that is, in excess of their asset protection allowance - is assessed at 5.64 percent. The asset protection allowance for a typical college family is currently around $19,500. Savings in a student's name, however, are assessed at 20 percent or 25 percent, depending on the methodology the school uses to calculate EFC.

So if Grandma gives your child $30,000 to put in his college savings account, it adds at least $6,000 to your Expected Family Contribution.

To make matters worse, students don't have an asset protection allowance - another reason not to hold assets in the student's name.

Don't pay for college with a grandparent-owned 529

Some financial advisers have actually recommended this as a strategy to reduce college costs. Make sense, right? While it may be true that this triggers no assessment on either the parent or student's assets, there is still an assessment - and it's much worse. According to FAFSA rules, money paid out of a grandparent's 529 is considered untaxed income to the student. And the assessment on student income is a whopping 50 percent.

While students don't have an asset protection allowance, they do have a small income protection allowance. The student's gross income protection allowance is $6,420. What this means, however, is that every dollar over the income protection allowance is assessed at fifty cents on the dollar.

So, if grandma sends $16,300 dollars directly to the college for your student's first year's tuition, it raises your EFC by an additional $5,000. And if your student has already reached their income protection allowance, the EFC could be raised by over $8,000.

Don't use or borrow retirement funds

Many parents make the mistake of thinking they're getting a break from the government when they pay for college out of IRA funds. The government waives the 10 percent penalty for funds withdrawn to be used for college.

What parents forget is they are adding to their income when they withdraw funds from an IRA. Parent income is typically assessed at 47 percent, making this another bad move.

Don't miss out on key tax deductions & credits

Parents sometimes make an error in paying their entire college costs out of their 529s, only to learn that they can no longer claim the American Opportunity Tax credit. Because the parent has already received a tax benefit from the tax-free distribution from their 529, the federal government considers that claiming a $2,500 tax credit would be "double-dipping" which is not allowed. Work with your tax adviser. You don't want to miss out on $2,500 in free money from the government.

Do become acquainted with EFC reduction strategies

Before you start figuring out how you're going to pay for college, educate yourself. One of the best books out there dealing with EFC reduction strategies is "Paying for College Without Going Broke" by Kalman Chany.

But often it's not enough to do everything yourself, or even just rely on your regular CPA, who may not know all the latest rules. The foolproof way to get the most complete, current information is to seek the help of an experienced college planning specialist.

Do learn different methodologies for calculating the EFC

Recently, a parent we know followed his accountant's advice to cash out his $150,000 in stock funds and pay down his mortgage. He was told it would save a bundle on college.

While it's true that this move might have saved him $7,500 a year in college costs, that's not how it worked out. Under the Federal Methodology, which most all public universities and a majority of private colleges use, this move could have achieved that result. Under FAFSA rules, the equity in one's home is not used to determine EFC.

This was not true at all three schools his daughter was interested in attending. These particular schools used what is called the Institutional Methodology to determine EFC. Under this method, home equity is assessed.

Not only did this move do little to bring down EFC, but the stocks he cashed out would have increased in value by about 25 percent if he held on to them during that two year period.

Do learn how to use the award appeals process

Many families don't realize there is still money to be saved, even after their final award letters are received. Awards can be appealed. Obvious examples would be when there has been a change in family income or if the family suddenly incurred some unexpected medical expenses.

What really is news to most parents is that an appeal can also be made because another college - not your student's first choice - made your student a better offer. However, don't try playing one school against the other unless they have similar rankings.

For the best results, read up on how to write a good appeals letter before you act, or seek out of a local college coach who does this kind of work.

Feel like you need an advanced degree to plan for college?

Admittedly, there is plenty to learn and navigate when planning for college. Next to your home, college is likely to be the second largest investment of your life.

Whatever you do, start early. When your children are in middle school is a great time to start. Waiting until your child is a senior in high school may be too late.

And while all these guidelines are provided to get you on your way, no college funding strategy should be attempted without the guidance of a knowledgeable adviser. Even a great CPA could end up costing you thousands of dollars in financial aid if he/she doesn't know this area well. Sometimes, you just need the help of a specialist. Planning for college is one of those times.

• Jim Slowik is chief college funding strategist of MyCollegePlanningTeam.com, a Naperville organization that brings together experts from both the academic and financial services communities. Contact him at (630) 871-3300.