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Pay Less For College

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Financial aid for the well-heeled.

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Listing the family business as the owner of your 529 College Savings Plan can make your college-bound kid eligible for buckets of financial aid that wouldn't otherwise be available.

The key: reducing personal assets to increase the amount of financial aid available to your student.

"It's a financial dodge for the rich," says Reecy Aresty, author of How To Pay For College Without Going Broke. "The wealthy can now qualify for tens of thousands of dollars in financial aid. It's easy, legal and the intent of the law."

Here's how it works:

On July 1, 2006, the Higher Education Reconciliation Act of 2005 took effect, requiring 529 Plans to be reported as a parental asset. This would limit financial aid available to many students, but the law included an unusual twist – the net worth of a small business owned by the family isn't counted as a family asset if it employs fewer than 100 full-time workers.

"If you plan to set up a 529 Plan, simply have the family business listed as the owner of the plan," Aresty says. "Parents can legally transfer the entire value of an existing college savings plan to a similar plan owned by their business. The transfer could trigger taxes, but only on the plan's net gains." In most cases, the benefits outweigh the tax consequences, but check with your financial adviser first, he says.

The Higher Education Reconciliation Act cut federal spending by about $12 billion, but apparently attempted to offset this by changing the way private funds are counted when determining eligibility for student aid.

"It's not a question of fair," Aresty says. "It's the law so this isn't gaming the system. This is the absolute best thing for people of means."

Financial aid applicants are required to complete the Free Application for Federal Student Aid and must list their assets as of the day the form is completed. This makes it easy to transfer a 529 Plan to the family-owned business prior to completing the form – and the financial statement can be amended at any time. If you have to, you can transfer ownership of the 529 College Savings Plan to the family business and then file an amended Free Application for Federal Student Aid.

A 529 College Savings Plan functions much like an open-end mutual fund, and is run by professional money managers. All 50 states now offer a 529 Plan and some offer more than one. There's no requirement to use the program in your state, and performance varies among the various funds. However, many states offer tax incentives to keep the money at home so do the math before putting your money into an out-of-state plan.

View a 529 Savings Plan as part of your family's overall financial plan. Set aside a predetermined amount each month, but pay the bills first. If you've blown past your credit limit on several cards, it makes more sense to pay the bank first, because an interest rate of 20% or more on credit card debt can eat you alive.

Section 529 of the Internal Revenue Code created the college savings plan much like Section 401(k) created individual retirement accounts. The 529 Plan comes in two basic types: state-sponsored and independent.

Savings in a state-sponsored 529 Plan can be used at most accredited colleges and universities in the US and many schools abroad. The plan's benefits include tax-deferred growth and withdrawals free from federal taxes when used for "qualified expenses," such as tuition, fees, books, supplies, required equipment and eligible room and board.

The Independent 529 Plan is the first prepaid plan sponsored by private, or independent, colleges in the US. Participants can prepay all or part of future tuition at a private college at less than current prices and receive the tax advantages of a 529 Plan. About 250 private college and universities participate in the program.

"This is very straightforward," says Aresty, who launched PayLessForCollege.com. "It's not in the small print. Clearly, this is designed for people of affluence and influence; it's not much help to those with total assets of $50,000."
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