Perhaps the ugliest road bump that lays in wait for parents headed toward retirement is college planning. The very word "tuition" can strike fear into the hearts of even the most savvy retirement savers, especially those with kids in high school. Just at the point when parents see their retirement accounts finally starting to show some tangible growth of their own, they are assaulted with tuition bills that can easily equal or exceed the rest of their debt combined. And while much attention and advice has been devoted to planning for college, far less emphasis has been placed on helping families actually pay for college when they don't have years and years to save for it.

Last-Minute Alternatives
Even parents who do not have long-term savings laid up for their children's educations have a number of weapons they can use against the tuition monster. The effective coordination of some or all of these alternatives can make a substantial difference in the overall education bill that is ultimately presented to them. While several of these techniques are fairly common, there are some lesser-known strategies that can greatly benefit parents as well.

  • Education tax credits - The hope and lifetime learning credits can provide a shot in the arm for parents (and students) seeking relief from college expenses. (To read more on this topic, see Clearing Up Tax Confusion For College Savings Accounts.)
  • Student loans - Loans may be the most common remedy for college costs. Their potential deductibility makes them more palatable as well. It may be more financially sound to have Junior take on the debt for his own schooling, but make sure to discuss this option with a financial advisor before letting your child shoulder this debt. (To learn more about these loans, see Getting A Loan Without Your Parents and Pay For A College Education With Retirement Funds.)
  • Scholarships - The notion of scholarships can make parents dance to the music now playing in their ears. The more expensive the school is, the louder the music plays. Ensure that you and your kids are aware of all the options available to you and make sure that your children apply for any and all applicable grants.
  • Asset shifting - A critical issue to explore when applying for financial aid is shifting assets to avoid excess taxes and increased interest payments. Many parents are unaware that cash value life insurance and annuities of any kind do not count as assets on the FAFSA financial aid form.Investing 401(k) assets within an annuity can yield an enormous difference in the amount of financial aid that is available to the family. A worker with $250,000 in his or her 401(k) and another $150,000 inside a Roth IRA will not have to declare any of it as eligible assets when applying for aid. Furthermore, shifting assets into insurance-based vehicles will aid parents in retirement planning as well, as these instruments grow tax-deferred. If parents have $100,000 in taxable liquid assets that they do not want to have to declare, moving the money into an annuity will both allow it to grow without tax bills until retirement and improve the parents' implied financial need for the FAFSA form. Therefore, this strategy can help parents to accomplish two goals at once.

Shifting funds from a custodial account to a 529 plan can improve the chances for financial aid as well, as the College Cost Savings Act of 2007 stipulates that 529 plans that are owned by a third party do not count as assets on the FAFSA. Finally, gifting appreciated assets that you may have will allow for a step-up in cost basis when the student sells the asset and will also reduce your declarable assets. (For related reading, see Chooosing The Right Type Of 529 Plan.)

  • Hiring children for your business - Parents that own businesses should hire their kids as employees. This allows the students to not only earn income that can be used to pay for college expenses, but could potentially make them eligible for the earned income credit and possibly other credits as well. This is especially effective for students who are at least 24 years old and can no longer be claimed as dependents even though they are away at school. If they are less than 24 years of age, then it may be necessary to compute the parents' tax return both with and without the children as dependents to see which way is more beneficial. (To learn more about the earned income credit, see Using Tax Lots: A Way To Minimize Taxes.)
Understanding the myriad variables that enter into effective college planning and how they interact with each other can be difficult without a written comprehensive financial plan, or at least a college funding plan. Parents will need to see how much tuition will be covered by loans, how much can be paid for with savings and how much the student needs to earn in order to get a clear picture of where they currently stand. Estimating tax credits and deductions may also be helpful. A fairly accurate cash flow analysis can be run here, because both the time frame and projected expenses are fairly defined. But knowing exactly how college funding will affect retirement planning is also critical, and a comprehensive financial plan can also clearly illustrate this issue. Delaying retirement for a few years in order to pay for college may be necessary, and parents need to know what impact tuition may have on their future plans. (To read more about college vs. retirement payments, read Don't Forget The Kids: Save For Their Education And Retirement and Close The Bank Of Mom And Dad.)

Using every resource available to you will help to ease the burden of college planning, but knowing how to effectively coordinate those resources is of utmost importance. It is never too late to begin planning for your student's future, even if it is less than a year away. Consult with a financial planner or college planner in order to find out what resources are available for you.

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