17 Oct How can I manage this asset so it doesn’t hurt college aid from the FAFSA?

Q. I have shown my son’s UTMA amount on his FAFSA and ended up paying 20% from that account for tuition. For 2023, I would like to save the rest of the UTMA amount to pay his future expenses, like his Master’s Degree. How can I show it on the FAFSA so it won’t count against him? I have another child in medical school and I am a single parent.
— Mom

A. You sure have a lot of tuition bills ahead of you.

It’s important to develop a strategy of how to fund education expenses each year, but we also don’t want you to forget about your own retirement. More on that in a moment.

There are a number of sources of funding that may come into play for education bills, said Peter McKenna, a certified financial planner with Modera Wealth Management in Westwood.

This includes parental savings, student’s savings, parental income, student income, loans and scholarships.

“Having a game plan of how each of these sources will be tapped each year to fund undergraduate and graduate school is critical,” McKenna said. “In order to make informed decisions around the funding, you need to know if you are potentially eligible for need-based aid or not. ”If you are eligible for undergraduate need-based aid, it’s important to know how each component above factors into the FAFSA calculations as well as any school-specific calculations, he said.

The federal formula assumes 6% of a parent’s assets are available each year to support the undergraduate student, while 20% of assets in the student’s name are assumed to be available each year, McKenna said.

“All else being equal, if eligible for need-based aid, spending the child’s assets earlier in the process and the parent’s assets later could make sense,” he said. “If loans are going to be needed, how much and when to borrow are important things to plan for.”

There are limits to how much you can borrow in Stafford loans each year, so if more than $20,000 is anticipated to be needed for the four years, having a strategy to borrow some each year may make sense, he said.

If private or Parent Plus loans are needed, it may make more sense to delay the borrowing as long as possible, he said.

“The rules for grad school are different and knowing the rules around Public Service Loan Forgiveness is important for the child in medical school,” he said. “Many doctors take roles at not-for-profit hospitals upon graduation and may be eligible for loan forgiveness.”

To your specific question and the 2023-24 FAFSA, which just opened on Oct. 1, know that the form will consider income from 2021 and assets at the time you complete the form, McKenna said.

You may still have time to develop your plan of which buckets to tap for each semester, he said.

“If eligible for need-based aid, it could make sense to have the student fund the spring semester instead of the parent to reduce the assets assessed at 20% and preserve assets assessed at 6%,’ he said.

One other thing with the plan is that it needs to be flexible. Many 529 accounts have taken losses in 2022 and it may make sense to give them time to recover and pay upcoming expenses from other sources, he said.

“The best time to plant a tree is 20 years ago, the second best time is today. Developing an education funding plan is similar,” he said.

McKenna said it’s important to have a financial plan that considers education funding while not forgetting about retirement.

“The greatest gift any parent can give a child is knowing that the parent can live out their days with dignity and independence,” he said. “If your retirement security is not in good shape, determine what corrective actions are needed before addressing the education goals for your children.”

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This story was originally published on Oct. 17, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.