Financial FAQsSavvy saving is your key to best financial-aid package

By Scott Whytock

Each issue, this column will answer a frequently asked question regarding money and financial matters. Whytock, a Certified Financial Planner ^TM, is the director of advisory services at Portland-based Aurora Financial Group, a Registered Investment Advisory. He, his wife and two young sons live in Scarborough

Q: My oldest daughter will be applying to college in a couple months. With that comes an eventual very large bill. I am a single mother who is a real estate professional and I need to figure out how I’m going to pay for this. I have a college fund that I’ve put into a savings account in my name over the years, but it’s not enough to pay for a full year of school. I’m not quite sure where to go from here.

A: This is a common and confusing situation for many people. Once your daughter begins to receive acceptance letters from different universities, you will begin the process of completing financial aid forms. Your daughter will be awarded various types of financial aid, based on the cost of each institution and the amount that your family can provide. You may receive grants, work-study or loans that will assist in offsetting the amount of money that you’re expected to contribute. The differences between these options can be quite significant and should be understood fully.

You will quickly see what each institution expects to receive from your family. The benefit in the way you’ve saved money is that you’ve kept it in your name and simply “earmarked” it for education. Parents are expected to pay approximately 5 percent of assets toward their child’s education, with the balance of the costs made up by financial aid. Should that same savings account have been created in your daughter’s name, she would’ve been expected to pay 20 percent of those assets per year. Clearly, it is extremely beneficial to have money in your name versus your child’s name when financial aid is a topic of discussion.

It is also important to apply for the scholarships available to your daughter at her high school. People assume that they have a small chance of getting them or that they won’t have a substantial impact. Local employers, civic groups and educational endowments are looking to hand out money for scholarships. Your high school’s guidance counselor should be a good resource for scholarship listings. You should also check with your university’s financial aid office for their help. Of course, there are plenty of Web sites that will also assist with the search for scholarship money.

Many parents feel the need to do as much as possible to reduce the amount of loans that their child will have to deal with after college graduation, and will entertain the thought of removing money from a retirement account. The sentiment is noble, but this isn’t wise in most cases. If you were to borrow from your current 401(k), and then left your employer before you completed paying back that loan, you would be expected to repay the amount borrowed immediately. If the borrowed amount was not repaid, it would be deducted from your 401(k) and reported as an early distribution, assuming you’re under 59 1/2. This would cost you income taxes and a 10 percent penalty on the amount withdrawn. Remember, you can borrow for education, but you can’t borrow from banks to fund your retirement plan.

Finally, when you get your financial-aid package, it is important to know that this is a negotiable situation. Your family may have unique financial circumstances worthy of explanation and discussion with the financial-aid office. This could be a meeting that will be beneficial to you and your daughter’s finances for years to come. The entire topic of financial aid and educational funding can be multifaceted and overwhelming and should be discussed thoroughly with your Certified Financial Planner ^TM.