If you’ve got kids in high school, you know how expensive it can be—food, clothes, car insurance… And of course, there’s that big expense coming up; college. A little strategic planning right now could help you with your college expenses in the future. Let’s take a look.
Senior year: If your child is already a senior, you’ll be completing the FAFSA application soon. You financial picture for the college process is already done so there’s not much you can do now. Even if you don’t think that you’ll qualify for financial aid, you should complete the FAFSA anyway. Should your financial situation dramatically change, you may be able to renegotiate your aid with the school. You won’t be able to without a completed FAFSA application on file.
Junior year: This is the most important year for you as far as tax strategy. If your child is a high school junior right now, then your 2011 income tax return is what will be used to determine your future financial aid. It’s really important to think through any actions that may affect your income. For example cashing out an IRA or 401(k) right now would increase your taxable income, and because of that would reduce your potential financial aid. Cashing out stock for a capital gain—same thing. On the other hand, cashing out stock for a capital loss would reduce your income. Be sure to take advantage of any programs that would reduce your taxable income such as flexible spending accounts and adding to your 401(k) if possible.
Sophomore year: This is the year before you’re working on the FAFSA. If you anticipate that you’ll need to sell stocks, cash out 401(k)s or anything else that would raise your income, this is the year to do it in. While the parent of a junior would want to defer income, if your child’s a sophomore you’d rather claim the income during this year. This is a little counter-intuitive. A tax person is always going to advise deferring income, but this is the one year where that’s not the case because you really want to keep that junior year income down.
Freshman year: Welcome to high school. It’s hard to think about college when you’re still trying to adjust to Friday night football games and the concept of your child riding in a car with other kids. In a perfect world, you’ve been saving for college since pre-school and you’re all set. Unfortunately, the world isn’t perfect and life gets in the way. Now’s the time to really think about money. How are you going to pay for your child’s education. While your student might not have a clue yet about what school to attend, you need to start thinking about it. How much can you really expect to contribute to tuition? How are you going to make up the difference? You don’t need to solve all these issues now, but you need to do some serious thinking now, before you get to graduation without a plan.