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Non-parent Paying for College & How to Structure
Old 07-21-2018, 04:56 PM   #1
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Non-parent Paying for College & How to Structure

DH and I are in the fortunate position of being able to pay for our nephews and nieces college. First one starts next month with the other two each two years later (same family). Parents are middle class in a HCOL area, not entitled to needs-based funding but struggling to figure out how to pay.

First one has received merit based scholarships, but cost will still run $25K/yr. I am assuming best way to handle the finances is to pay the school directly. This keeps the $ out of the parents hands come future FAFSAs. Am hoping I can charge on my cc to get the 2% cash back .

I am also hoping by paying directly to the school we bypass the gifting issue. We give the kids substantial b'day and Xmas money, so will be very close to the max gifting per year for kid 1. Kid 2 has her eye on a private faith-based school so this may come into play with her.

Any thoughts on how to structure this so that the parents may be eligible for some needs based funding when the 2nd kid heads off to college?
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Old 07-21-2018, 05:59 PM   #2
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Pay the school directly. This avoids gift tax issues - money paid directly to college does not count against the annual gift tax limit I believe.

It is also probably best from a FAFSA point of view. Although there is a question on the FAFSA about tax free aid received by the student, and you paying their tuition might qualify, so you might need to look at different approaches if they might qualify for federal aid. One possible approach is to have them take out loans and then pay off or pay down the loans for them after their last FAFSA is filed. But then you'll have origination fees and possibly interest.

Look into the American Opportunity Tax Credit, Lifetime Learning Credit, and tuition and fees deduction. If you're paying out of pocket, you might be able to take them. Although since they're probably not your tax dependent, that might rule these idea out.

The school, if they accept credit cards, will likely charge a >2% convenience fee. Probably not worth it, but you could ask. It might help you hit a bonus for spending $5K in the first three months if you have a new credit card; if so it's worth it for simplicity's sake if you don't want to do manufactured spending.

Some basic things the parents can do:

Go ahead and fill out a FAFSA now - they may be pleasantly surprised and may get some aid for kid #1 - even a few thousand dollars would be worth filling out a form. Often schools require students to fill out FAFSA to be eligible for work study jobs and/or school-based merit aid.

Having two kids in college helps - the family's contribution (the EFC) is divided between the two students. So one idea - and this depends a lot on the family's circumstances and values - is to have the older kid take a gap year so that the two kids overlap in college for three years instead of two.

Financial aid is handed out on a first-come-first-serve basis and can be filled out any time on or after October 1st the year before the year in question. So if kid #1 is going to school this fall, they could have filled out the FAFSA about nine months ago for this year, and they should fill it out in three months from now for next year.

If there's any chance of federal aid, the parents should, as much as they can, use any taxable investments or savings to pay off debt such as credit cards or car loans or pay down their mortgage or stick it into retirement investments. For FAFSA, home equity, car equity, and retirement investments generally don't count at all, they don't care at all about debt, but they ding any taxable assets.

If there's any chance of federal aid, the student really shouldn't work and should use their taxable assets up somehow. Student income and student assets are "taxed" heavily in the FAFSA formula.

Other ideas:

Have the kids go to in state public universities. Those are almost universally cheaper than private schools (The $25K figure for kid #1 after scholarships sounds like a private school to me.)

If the kids are supersmart and super-every-thing-else, apply to some Ivy League schools. They're basically free for middle-income folks.

If there is a good university or universities near you, encourage the kids to attend nearby. If they live with you they can pay you rent and still save money - on-campus room-and-board is generally a rip-off by 1.5x. Even if they don't live with you, having an aunt or uncle nearby can be a nice benefit.

If the parents' or your home state offer a 529 plan, rinse your eligible expenses through one. You can contribute, say $5K to a 529 in your state, take a state tax deduction, take the $5K out the next day to pay for eligible expenses. In my state that generally works out to about an 8% discount on that $5K. If the tax deduction in the parent's home state is more valuable, you can give the parents $5K and then have them do exactly the same thing.

Some of the above is spitballing, so YMMV and check the rules, but there's some ideas for you to look into.

Good luck!
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Old 07-21-2018, 07:11 PM   #3
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Quote:
Originally Posted by TrvlBug View Post
DH and I are in the fortunate position of being able to pay for our nephews and nieces college. First one starts next month with the other two each two years later (same family). Parents are middle class in a HCOL area, not entitled to needs-based funding but struggling to figure out how to pay.

First one has received merit based scholarships, but cost will still run $25K/yr. I am assuming best way to handle the finances is to pay the school directly. This keeps the $ out of the parents hands come future FAFSAs. Am hoping I can charge on my cc to get the 2% cash back .

I am also hoping by paying directly to the school we bypass the gifting issue. We give the kids substantial b'day and Xmas money, so will be very close to the max gifting per year for kid 1. Kid 2 has her eye on a private faith-based school so this may come into play with her.

Any thoughts on how to structure this so that the parents may be eligible for some needs based funding when the 2nd kid heads off to college?
If the #1 kid is getting a merit-based scholarship that is not related to financial need, your contribution should not affect getting that scholarship in the future. Ask for a copy of the offer letter and read the info related to the scholarship. If you're still in doubt, call the financial aid office and ask whether the "Presidential Scholarship" (or whatever they call it on the offer letter) has any tie to need.

Payments made directly to a college do not count against your ordinary (no special return) gift limit.


Very few religious colleges meet full need. (Actually, very few colleges, in general, meet full need.) Technically funding you provide for college is considered part of the student's income in the year it is provided. However, the way this matches up with FAFSA years means that it doesn't really have any opportunity to affect FAFSA calculations until junior year:

2018-2019 FAFSA is based on 2016 income
2019-2020 FAFSA is based on 2017 income
2020-2021 FAFSA is based on 2018 income
2021-2022 FAFSA is based on 2019 income
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Old 07-23-2018, 05:33 PM   #4
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Thank you for your input. Kid #1 has decided on an in-state school ($25K total 2018/19 costs). Their program in his field of study is one of the very best and hard to get into. Both his parents as well as DH and I were hoping he would select this one. The $25K I'm using is the amount ($17K-$27K) not covered by merit based aid, so it's probably a few K less than the $25K. We were using $25K as he had not yet decided which school. Funny, he applied and got accepted to many including some really pricey ones. After all the merit aid, they were all in the $17-26K range so I suspect his merit aid is really based upon the FAFSA as well as other factors.

He's very bright and has honors courses under his belt. He's planning on grad school and has been working summers since 14; in fact so have his siblings. Very strong work ethic in the family. We haven't made a commitment but will most likely provide some support for grad school.

I've done some research wrt tax savings and the like for us and there aren't any, federal or state. Research indicates the tuition costs won't affect the gifting limit, however, non-tuition costs will. I will have to confirm that with our tax man, but we're OK on that front.

Paying directly should also help the family with kid #2 on their FAFSA as our contribution should affect kid #1 income only, not the family's and as mentioned, the EFC should be reduced.
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Old 07-24-2018, 01:39 PM   #5
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Originally Posted by TrvlBug View Post
Am hoping I can charge on my cc to get the 2% cash back
Most colleges now charge a service fee for using a credit card that negate the points or cash-back rewards. But it's definitely worth looking into.
This morning I just charged a couple of classes for DW's MBA in which they charged a 2.5% service fee. Supposedly DW's megacorp will reimburse the credit card fee...I am skeptical but my DW was sure of it. We shall see after she get's her grades. Best case I get the cash back about $120, worst case I lose around $30.
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Old 08-14-2018, 09:08 AM   #6
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Most colleges now charge a service fee for using a credit card that negate the points or cash-back rewards. But it's definitely worth looking into.
This morning I just charged a couple of classes for DW's MBA in which they charged a 2.5% service fee. Supposedly DW's megacorp will reimburse the credit card fee...I am skeptical but my DW was sure of it. We shall see after she get's her grades. Best case I get the cash back about $120, worst case I lose around $30.
I just paid the fall semester amount by cc and NO fees posted anywhere on the payment site. For this Univ, the cc service fees are baked into the costs.
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