Higher education is expensive—frighteningly expensive. For most parents, providing for their children’s college education is second only to retirement as their largest investment goal. But even with diligent saving, the first tuition bill may be a shock to your clients, so you may want to keep a jar of smelling salts on your desk just in case.

How can you help your clients face this fear head-on? It’s all about creating a solid plan. With a proper plan in hand, you and your clients will be better prepared to tackle college tuition bills in an organized and financially sound way. Sallie Mae recently published research1 that reports families are paying less out of pocket for college as they take advantage of scholarships and grants.2

Vanguard’s new research, Tackling the tuition bill, provides a practical framework to help you develop a plan with your clients. In this post, I’ll explore the factors that affect financial aid eligibility. (In Part 2 of this series, I’ll provide tips on how to help your clients maximize federal tax perks while also considering how to spend tax-efficiently from assets earmarked for college.)

 

Have you seen our Tweets about Tackling the tuition bill?

 

As you know, household assets and income affect financial aid eligibility, but these sources are not treated equally, based on whether they come from the student or the parents. The graphic below summarizes the key points—income matters more than assets, and student income matters more than parental income.

 

The potential impact of student and parental income and assets on financial aid

For every additional $1,000 of income, need-based financial aid could be reduced by up to:

college-financing_bruno_parental-income college-financing_bruno_student-income

For every additional $1,000 of assets, need-based financial aid could be reduced by up to:

college-financing_bruno_parental-assetscollege-financing_bruno_student-assets

college-financing_bruno_notes2x

 

 

So what does this mean? Obviously, individual circumstances will vary, but here’s a savvy strategy to pitch to your clients:

  • Spend the student’s assets first. Because student assets affect aid eligibility more than parental assets (oddly enough, 529s owned by dependent children are considered parental assets), it can make sense to spend student assets before spending from a 529 plan. Such an approach gives 529 savings more time to compound tax-free. And by spending the more heavily penalized assets early, students increase their aid eligibility in later years, when inflation may boost tuition costs.
  • Tell the grandparents to hold off. Gifts from grandparents and others are considered student income, which has the greatest impact on your student’s financial aid eligibility. As a result, consider tapping those grandparent-owned 529s in the later years of college, when they will no longer be reported or considered in financial aid evaluations.
  • Don’t drain the 529 right away. Parent-owned assets, including 529 plan accounts, have more limited impact on aid eligibility. Unless a client plans to pay for the entire degree with 529 savings, it can make sense to spend from this account strategically over the course of a student’s college career. The account can benefit from continued tax-free growth. A client may also be able to time 529 withdrawals to create opportunities for additional aid or benefits.

I realize there’s a lot for you and your clients to think about; but with a bit of knowledge of the rules and some planning, the tuition bills can be tamed. Look for Part 2 of this series, in which I’ll share some tax-savvy tips for tackling tuition.

 

Special thanks to my colleagues Jonathan Kahler and Jenna McNamee for their research contributions.

 

1 Sallie Mae, 2016. How America pays for college 2016. Accessed October 3, 2016, at http://news.salliemae.com/files/doc_library/file/HowAmericaPaysforCollege2016FNL.pdf.

2 Scholarships and grants funded 34% of college costs in the 2015–2016 academic year, up from 30% the prior year.

 

 

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The availability of tax or other benefits may be contingent on meeting other requirements.

For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.