Free-Reprint Article Written by: Marc R. Hill See Terms of Reprint Below.
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Understanding the pros and cons of any financial moves made during your base year - or any year in which financial aid is applied for - from both a tax and financial aid standpoint goes a long way toward determining what you pay for college. So, let's take a look. Additional Article Information: =============================== 695 Words; formatted to 65 Characters per Line Distribution Date and Time: 2009-02-27 11:12:00 Written By: Marc R. Hill Copyright: 2009 Contact Email: mailto:[email protected] For more free-reprint articles by Marc R. Hill, please visit: http://www.thePhantomWriters.com/recent/author/marc-r_-hill.html ============================================= Special Notice For Publishers and Webmasters: ============================================= If you use this article on your website or in your ezine, We Want To Know About It. Use the following URL to let us know where you have used this article, and we will include a link to your website on thePhantomWriters.com: http://thephantomwriters.com/notify.php?id=6583&p=load HTML Copy-and-Paste and TEXT Copy-and-Paste Versions Of Article Are Available at: http://thePhantomWriters.com/free_content/db/h/college-financial-aid-base-year.shtml#get_code --------------------------------------------------------------------- Happy New Year, Class of '10! And Welcome to Your College Financial Aid Base Year Copyright (c) 2009 Marc R. Hill Reduce My College Costs, LLC http://www.reducemycollegecosts.com As they were ringing in the New Year on January 1, high school juniors and their parents were also ringing in their college financial aid "base year." Although the actions taken in the base year can mean the difference between saving thousands on college expenses and needlessly overspending, few people understand what they need to do to achieve the former rather than suffer the latter. So, let's take a closer look. If you are like the vast majority of American's in our sagging economy, your family will be looking for additional funds to help cover the cost of a college education. The largest share of this need-based supplemental money comes from the federal government through its financial aid system. But the government also assumes that you are able to participate in the expense of educating your child prior to considering how and to what level they will participate in funding your child's education. Therefore, in order to determine your initial level of participation, families are required to fill out the Free Application for Federal Student Aid, or FAFSA form. The FAFSA captures the required financial information used to calculate how much your family is expected to pay via a formula known as the Federal Methodology (FM). Your initial or beginning monetary participation level is known as your Expected Family Contribution (EFC). The data used to generate the initial EFC calculation is collected beginning in January of your child's junior year in high school and ends on December 31 of that same year, which would be his or her senior year in high school. This time frame is referred to as your "base year." In essence, if you're in your base year, you are now under the financial aid microscope and any financial moves being considered (including the sale of real estate or stocks, withdrawals from IRAs, contributions to retirement plans, receiving monetary gifts, etc.) must be weighed not only from a federal tax standpoint but also in relation to the financial aid system. The catch is that what makes sense from a 1040 point of view may have adverse consequences on your chances of receiving financial aid. Case in point: Consider contributions made to your 401(K) plan at work during your child's base year or any year prior to financial aid application. In order to encourage individuals saving for retirement, the federal government does not tax contributions made to 401(K) plans up to a specified annual limit. This money enters the retirement plan on a pre-tax basis with taxes being accounted for as money is withdrawn to supplement retirement. The Federal Methodology used to calculate your EFC treats these contributions from an entirely different prospective. The financial aid system believes that you can stop contributing towards retirement and apply these contributions to college expenses. They anticipate you playing "catch up" with these contributions after your child is out of school. Accordingly, your pre-tax retirement contributions, which are not considered taxable 1040 income, are considered "untaxed income" by the financial aid system and are added back into the EFC calculation and assessed at the applicable rate. If we assume an assessment rate of 30 percent and $10,000 of retirement contributions, your initial EFC just increased by $3,000 for the year in which federal aid is applied for. This could very well eliminate you from being considered for preferred financial aid. This is not to suggest that you discontinue your retirement contributions. However, the harsh reality of the situation is that the enormity of funding your child's college education and your retirement collide with each other at an inopportune time, especially as our national economy struggles. As you make decisions regarding college education versus retirement funding, you should carefully weigh how each decision will impact your wallet, both during the base year and well into the future. Understanding the pros and cons of any financial moves made during your base year - or any year in which financial aid is applied for - from both a tax and financial aid standpoint goes a long way toward determining what you pay for college. The process is complicated and should only be done in consultation with a qualified professional. --------------------------------------------------------------------- Marc R. Hill is a financial planner who coaches and educates families on how to dramatically reduce their college costs up to $12K or more! Now you can learn how to cut your family's college costs and protect your retirement account with Hill's FREE e-newsletter: "College Savings Tip Sheet." Subscribe now for free at http://www.reduceyourcollegecosts.info and receive two FREE issues of Hills members-only newsletter "Affording College." --- END ARTICLE --- Get HTML or TEXT Copy-and-Paste Versions Of This Article at: http://thePhantomWriters.com/free_content/db/h/college-financial-aid-base-year.shtml#get_code ..................................... TERMS OF REPRINT - Publication Rules (Last Updated: May 11, 2006) Our TERMS OF REPRINT are fully enforcable under the terms of: The Digital Millennium Copyright Act http://thomas.loc.gov/cgi-bin/query/z?c105:H.R.2281.ENR: ..................................... *** Digital Reprint Rights *** * If you publish this article in a website/forum/blog, You Must Set All URL's or Mailto Addresses in the body of the article AND in the Author's Resource Box as Hyperlinks (clickable links). * Links must remain in the form that we published them. 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Hill can be reached at: [email protected] *** Print Publication Reprint Rights *** If you desire to publish this article in a PRINT publication, you must contact the author directly for Print Permission at: mailto:[email protected] ..................................... If you need help converting this text article for proper hyperlinked placement in your webpage, please use this free tool: http://thephantomwriters.com/link-builder.pl ===================================================================== ABOUT THIS ARTICLE SUBMISSION http://thePhantomWriters.com is a paid article distribution service. thePhantomWriters.com and Article-Distribution.com are owned and operated by Bill Platt of Stillwater, Oklahoma USA. Learn more about our article distribution services by visiting: http://thephantomwriters.com/x.pl/tpw/info/article-distribution/index.html The content of this article is solely the property and opinion of its author, Marc R. 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