Suggestions to pay for college when financial distress

Paying for College
1

<p>Hi, I feel bad I really messed up my finances and have no money for my child’s college. I earn about $65,000 a year and have $45,000 in credit card debt. I am behind in my credit card payments. I owe NYS about $1000 in back taxes.</p>

<p>I am afraid my creditors will sue me for money owed and I can loose child’s money. I have no other assets.</p>

<p>These are my question:</p>

<p>I have about $14,000 in my child’s money that I have been keeping in my account so they would not be taxed at higher rate for Fafsa</p>

<p>1) Can I put $10,000 of this in a 529 plan and then get the $5,000 credit on my state taxes - will it be worth it? Can I even do a 529 now since I am in default on state taxes? Maybe I can borrow the $1000 from child to pay the taxes.</p>

<p>2) I need a way to protect or hide child’s money so it won’t be taken by my creditors.</p>

<p>3) Should my child just take out 100% loans on their name or should I do parent plus loans. I can’t believe I can get parent plus loans when I am in such a financial mess, but I can - what a strange world we live in. </p>

<p>State college is about $15,000 a year. And child can only get 1 Stafford loan no other scholarships, grants or money except TAP $500.00 Child is willing to work.</p>

<p>Any suggestions anyone can offer? My wife refuses to do bankruptcy.</p>

<p>I feel sick that I failed as a parent in my obligations.
Thanks</p>

2

<p>You need an accountant/tax attorney to handle all this, something you probably feel you cannot afford. It might be worth it in the long run. </p>

<p>I know that you can give up to $10,000 a year to someone without penalty or taxes, but it has to be with no strings attached. I don’t know whether it works for your own child.</p>

<p>A 529 becomes your child’s money exclusively for education, and you cannot touch it. Your child cannot “lend” you the $1000 out of it, either, since it must be used for college expenses. </p>

<p>The question is whether you want to protect the money (give it to the child, under his/her control) or reduce your EFC (the child’s assets elevate the EFC more than the parents’ do).</p>

<p>That money right now is considered yours, no matter what your intentions for it are, and so is fair game for creditors/state treasury.</p>

<p>I strongly recommend that you use $1000 of that money to pay your taxes to avoid legal trouble - and then protect $10,000 (or whatever the maximum allowable is) by putting it in your child’s name. Remember, though, if you put it directly into your child’s name as a gift, he can do whatever he wants with it, including spending it before tuition comes due.</p>

3

<p>First of all, pay those back taxes - or make arrangements to do so ASAP. $1000 is not that much - and you may be able to works out some sort of payment plan. But the problem is that a taxing authority can grab money from your bank account without having to go to court first – you just get notice one day from the bank that you are overdrawn, and it turns out that the state file a lien and took what it wanted. </p>

<p>Your creditors are a different matter: they can’t get at money in your bank accounts without first going to court, and so you will have plenty of notice before they can reach assets that are in your name but which are intended for your kid. </p>

<p>I don’t know enough about 529 accounts to tell you whether its a good idea or not to set one up.</p>

4

<p>See a credit counselor and see if you can get a payment plan worked out. That will keep the creditors away from you. Pay your taxes. Cut up the credit cards.</p>

5

<p>Putting my problems aside for moment, I still want child to go to college, what should I do? Let Child take out 100% loans if can or I take out parent loans and hope to pay back?</p>

6

<p>

Is your child starting college this coming fall? If so, I would suggest having the child work and take the Stafford loan, and that you pay the remaining expenses from the $14K, and give your child whatever is left. That will cover the 1st year, and will relieve you of feeling guilty about the money or worrying about creditors getting it. Just tell your kid that is all there is. </p>

<p>In the second year, the amount of available Stafford loan will go up slightly, and there may be other ways to save money. Your child might be able to get a job as an RA in a dorm, for free or reduced housing costs. Depending on location, your child may be able to save money on housing/meals by opting for apartment-style dorm housing or moving to shared housing off campus. Preparing one’s own meals can often be considerably cheaper than college meal plans, especially for kids who like to eat beans and rice or ramen. Your kid can take a part-time job during the school year and work hard during the summer. </p>

<p>In the meantime you can try to get your own affairs better in order, and you can plan to borrow on the PLUS loan during year #2. However, you need to catch up on your credit card payments or else your credit rating will deteriorate and you won’t be able to get the PLUS loan later on.</p>

7

<p>No parent loans. If the child works and also uses some of this money set aside, the amount he would need to borrow to cover the balance should not be too bad.
Also other options may exist as far as where he goes to school - community college, or local college as a commuter (save on room & board)
What does the child want to do?</p>

8

<p>The 10K will be well below the parental asset protection allowance-- so it won’t get assessed at all for college financial aid purposes if you keep it in your name. Put it in the kid’s name, and your aid gets reduced by $3,500.</p>

<p>With income around $65K and few liquid assets, and no assets in the child’s name, you should have a relatively low EFC (probably under 10K) and be eligible for significant aid in the form of grants, student loans, and work study.</p>

<p>I’d run the numbers through the FinAid calculator tonight to see where you are, roughly. Then get your FAFSA submitted. Use College Board to help identify in-state colleges that are reasonably priced and that have a good record of meeting most need. And get the college selection process going. </p>

<p>You’ll want to take whatever subsidized student loans that are offered. You probably won’t be eligible for a parental Plus loan due to your finances.</p>

<p>Then get with your creditors and work out some sort of payment plan to start paying down the credit cards.</p>

<p>And cut up the cards. </p>

<p>Good luck!</p>

9

<p>SBlake, I’m not sure, but I think that the OP’s daughter has already been accepted to college for next year with an aid package consisting only of loans and a TAP award:

I also think that the OP has already been approved for a PLUS loan:

I would agree with your advice to him if the question was geared to a student with another year of high school, but the problem is that no matter how much financial aid the kid qualifies for, it doesn’t help if the kid is already planning to attend a college that won’t offer grants to meet full need. Based on the numbers provided, the OP is looking at paying out almost 12,000 in college expenses for the coming year. </p>

<p>Quite frankly, with all the OP’s financial problems, I’m not sure that the $14K will be there in a year – which is why I thought it made sense under these circumstances for him to just give the kid whatever is left after paying for room, board & tuition. It won’t affect next year’s aid eligibility, because that has already been determined. </p>

<p>During the 2007-2008 school year, the FAFSA calculation will change, and only 25% of the child’s assets will be assessed – but given the fact that the child attends a college that is not offering grant aid, it probably won’t make a difference. The child will probably still qualify for Stafford loans, even if EFC goes up by virtue of a few thousand dollars in the kid’s bank account.</p>

<p>Frankly, my concern is that with all the financial pressures on this family, it will be extremely hard for this parent to refrain from spending the $14K on something else. I know what it is like to be overwhelmed with debt – sooner or later an emergency comes up and the temptation to “borrow” from the kid’s fund is too much, and then the money is gone.</p>

<p>I am hoping that somewhere along the line this kid has developed into a person who is more frugal and careful with money than the father. I don’t know that to be the case – but at this point the kid can’t be any worse. If the kid knows that this year’s gift is the last of the father’s money, the kid will be motivated to work and save and can probably manage to put himself (or herself?) through college; it’s very possible at a public institution.</p>

<p>You give excellent financial advice, but some of what you say only applies to families who are solvent - with kids attending the kind of colleges that meet full need. My background as a lawyer means that I’ve seen what tends to happen over time to families in financial distress, so my advice is practical. If the father tries to hang on to the money and instead used a PLUS loan this year… in a year from now the $14K will be gone anyway, plus the father will have fallen behind on PLUS loan payments and won’t qualify for further loans.

This is the one phrase that tells me this kid is going to be o.k. I just think that it’s better for this kid to get the benefit of the money this year, while it is there – and to know that he will be on his own for future years. Next year, if the dad is turned down for a PLUS loan, the kid will be able to take out a second Stafford loan in his own name, and I believe that the sophomore Stafford amount is going up to $4500 – so in 2007, if dad can’t borrow, kid can borrow $9000 if needed. And once the dad no longer is holding the $14K, he won’t feel the burden of guilt about the money, and will be free to focus on repairing his own financial problems. </p>

<p>Sometimes it’s just better for everyone to part ways financially and cut their losses.</p>

10

<p>I appreciate the help.</p>