Integrate college, retirement plans

Calculation of need-based aid involves many factors, including 401(k) and IRA contributions

Nov 30, 2014 @ 12:01 am

By Troy Onink

Since September, I have been in front of at least $5 million of potential new assets under management almost every week.

How? I help parents determine their best strategy to pay for college and save for retirement. I focus on four key areas: college selection, financial aid, tax aid and personal finances.

Even if prospects have people advising them in these areas, it can be difficult to pull that expertise together specifically for college planning and retirement purposes.

Advisers can use this complexity to simplify the college-funding process and determine parents' best strategy to pay for college while preserving assets and income for retirement. Do that, and you may be managing those assets as a trusted adviser.

The parents' income is the biggest element in calculating a student's expected family contribution (EFC) — the minimum amount the student and family are expected to contribute toward the cost of college.

Each of the three formulas used to calculate eligibility for need-based college aid — the federal methodology, the institutional methodology and the consensus methodology — provides families with “allowances” against their income.


Income is adjusted for FICA (Social Security), state and federal taxes, as well as an income-protection allowance. Parents are often astonished to find that 47% of the net available income (after allowances), is expected to be used for college each year.

In each of the formulas, contributions to qualified retirement plans such as 401(k)s and IRAs are added back to the parents' income.

Often, things that help reduce taxes also reduce a student's aid eligibility. The amount of tax paid helps reduce the amount of income calculated in the EFC formula; therefore, the more tax parents pay, the lower the EFC.

(More: Don't forget the middle children — Gen X)

But conventional financial planning strives to help parents pay fewer taxes, not more. So you can begin to see how complicated college planning can be.

The details of retirement plan contributions, especially in whose names assets are saved and in what types of accounts those assets are kept, are also big factors in determining eligibility for need-based financial aid.

Great grades and high SAT/ACT scores can get kids thousands in merit aid money at some colleges, so it's safe to say that anything that affects income, taxes and nonretirement assets also may affect a student's aid eligibility.

The first variable in the need analysis formula is the cost of college, however.

It's clear that the choice of college may directly affect a student's aid eligibility, because a student with an EFC of $20,000 will demonstrate need at a school that costs $45,000 a year but not at one that costs $18,000.

In addition, the American Opportunity Tax Credit is an example of what we call “tax aid,” which is available to some taxpayers when they cover qualified college tuition expenses.

What's more, because mass-affluent clients with higher incomes may not qualify for aid, income-shifting strategies and merit aid are especially valuable to them.

As a result, college selection, financial aid, tax aid and personal resources are interconnected.

That's why I explain to parents that college funding is a toll booth on the road to retirement.


Parents may have to deal with a number of those tolls, depending how many children they have and their age differences.

What parents need to know in advance is where their kids can get into college and qualify for aid, and which exits they can actually afford.

They need your guidance in order to choose the right exits and pay those tolls as wisely as possible.

You may know the best way for your clients to save for their kids' college, but do you know the best way for them to pay for it?

If you don't, they may seek out that advice elsewhere.

Instead of focusing on retirement planning, integrate college and retirement into an overall strategy. It will help enhance your existing relationships and attract new ones.

If you become the trusted adviser, the managed assets will accumulate quickly. And you don't have to reposition them into life insurance and annuities. Just do what's best for the client.

Troy Onink is the chief executive of, where he leads the new College InSource Partner Program for advisers.


How are you helping clients balance saving for retirement and children's college?

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