Do-It-Yourself Aid

 

Is college around the corner? Families too wealthy for need-based aid are turning to the tax code to help pay the bill.

Ashley Young, 18, is beginning her freshman year at $28,000-a-year Westminster College in New Wilmington, Pa. Her parents, Robert and Susan Young of Clearfield, Pa., earn too much to claim a $2,000 federal college tax credit or to qualify for need-based college aid. Yet the family is getting both a credit and $7,000 knocked off her tuition.

How? On the advice of neighbor Stephen Dudurich, a stockbroker and college planner, the Youngs sold stock funds in Ashley's custodial account last January, generating a $27,000 capital gain. That income allows her to pay her own freshman year bills and claim her own personal exemption and college credit on her tax return. Meanwhile, Ashley chose a college that provides price breaks to students with good grades. "It's like we're getting a year's tuition for free," says Susan, a fourth-grade teacher.

If you and your spouse together earn $125,000 or more yearly, you're unlikely to get traditional need-based college aid, unless you have two or more kids at expensive universities at the same time. But you can still cut costs--by seeking out merit grants and mining the tax code. Here are some strategies for families who are facing or will soon face college bills.

Ask for a Discount Good news for smart rich kids: Penn State education professor Donald Heller reports that between 1992 and 1999 the number of non-need-based price cuts that colleges awarded to families in the top income quartile jumped 160%, with one-fifth of the kids in this group getting deals in 1999. Since the discounts are available only to better students, they go by such euphemisms as "scholarships" and "merit grants." But in function they are pretty much like rebates on SUVs.

Some schools, like Westminster, advertise their discounts on their Web sites. Others don't publicize them. They cut prices either for students who squawk or for those who appear likely, absent a price break, to matriculate elsewhere. Troy Miller, a Gold River, Calif. college planner, advises kids to list at least six colleges they are applying to, in alphabetical order, on each application. That way, a school won't know what your top pick is and may be more likely to woo you with merit aid.

To get merit aid at some schools, you must first indicate that you want to be considered for financial aid and fill out lengthy financial aid forms. "If Bill Gates was my client, I'd tell him to fill out the forms," says Miller.

Some elite schools--Columbia, Emory, Harvard, Northwestern, Stanford--are pretty circumspect about price-cutting. But they have ways of competing for academically desirable students. Fill out the aid forms, and you may discover that the school can cut you some slack these days when it comes to awarding its own, as opposed to federal, dollars. "They're using a broad definition of financial need," observes Heller. Families with incomes up to $250,000 and two kids in expensive colleges should definitely apply.

In 2001 Lewis Lembeck was making $130,000 at a Silicon Valley tech company and paying full freight for his daughter at an Ivy League school that he asked not be named. He called up the aid office and said that with the economy being what it was and money tight, he was thinking of transferring her to another school. At the school's request he filled out an aid form showing that he also had a son enrolled at a state college that cost $13,000 a year, including room and board. The Ivy League school chopped her bill in half. (A university spokesman characterized the cut as "need-based.")

Emancipate Your Kids In 1997 Congress created two tax credits to help families pay for college. The Lifetime Learning credit equals 20% of the first $10,000 in undergraduate or graduate tuition, for a maximum $2,000 credit for 2003. (That's a credit, not a deduction; it reduces your tax bill dollar for dollar.) Any student, even an adult, who attends college or graduate school can claim the Lifetime credit. But only one credit can be claimed per couple per year, and couples with adjusted gross income of more than $83,000 lose part of it, with the credit totally denied at $103,000.

Alternatively, there's the Hope credit, which applies to only the first two years of college and equals 100% of the first $1,000 in expenses and 50% of the second $1,000--for a maximum $1,500. If eligible expenses are less than $7,500, the Hope is worth more. You can claim as many Hope credits as you have eligible kids, but the same income limits apply.

Still, as the Youngs discovered, it's possible for higher-income folks to tap into the credits by having their kids pay their own college bills and claim the credit. A child can claim his own credit so long as the parents don't claim him as a dependent on their return, even if they are eligible to do so. That may be no big loss, since couples with adjusted gross income above $209,250 lose some or all of the benefits of personal exemptions, as do the growing number of taxpayers caught by the alternative minimum tax.

Moreover, if you do this right, the child can claim his own $3,050 personal exemption. The key here is that the child must pay at least half his own expenses for basic support--food, shelter and clothing. But he can do that by selling assets his parents or grandparents have given him. If your child doesn't already have a hefty custodial account, start one now; you can give anyone else $11,000 a year without worrying about gift tax, so a couple can give each child $22,000 in stocks a year. The children will be able to sell the stocks at a 5% long-term capital gains rate, compared with the 15% their parents would likely pay.

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