Tips for Maximizing Your Child's Eligibility for Financial Aid
As you develop a strategy to increase your financial aid eligibility, you should ask yourself whether using a specific investment strategy is consistent with your ethical values as well as your long-term financial goals. As you think about financial strategies to increase aid eligibility, remember that federal, state, and institutional aid is not unlimited and there is only so much money to assist all potential aid applicants. Also, as you consider these tips, honesty is always the best policy.
Your goal is to lower the Expected Family Contribution (EFC), which is calculated from the Free Application for Federal Student Aid (FAFSA). The EFC is an amount, determined by a need analysis formula specified by federal law, which indicates how much a student and parent(s) can reasonably be expected to pay for postsecondary expenses. The EFC is used in determining eligibility for federal and institutional need-based aid. The lower the EFC, the greater the possibility of student aid, which may include grants, federal student loans, and employment.
- Timetable: In order to maximize your planning strategies, you should implement them at least two years before the student enrolls in college. This timetable may influence the results of the federal need analysis formula for the initial FAFSA data (freshman year of college).
- Base-Year Income: You should attempt to reduce your adjusted gross income and net worth for the "base year," which is the calendar year prior to requesting aid (e.g., calendar year 2010 for aid in academic year 2011).
- Treatment of Assets: Generally, parental assets (not including equity in a primary residence for Federal Methodology) are assessed up to 5.6% and student assets 20% for dependent students and independent students with and without dependents other than a spouse. The key with assets is ownership. Check with your tax advisor to determine ownership of a particular asset.
- Noncountable Assets: As you continue to plan for asset reallocation, certain assets are not used in the federal need analysis formula. These assets are retirement plan assets, your personal residence, life insurance, annuities, and personal property (e.g., cars, boats, etc.). Also, consumer debt is not considered in the formula. For example, if the family has $50,000 in cash and $50,000 in consumer debt, the family net worth for aid purposes is still $50,000. Consequently, asset planning favors maximizing noncountable assets and increasing investment or business debt instead of consumer debt.
- Capital Gains Earnings: You should attempt to minimize capital gains during the base year because capital gains are treated as income.
- Student Assets: If there are assets and money in the student's name, use those funds first because it will reduce the amount of future student assets reported on the FAFSA.
- 529 Plans: Invest in a 529 college savings plan owned by the parent because it has a smaller impact on the federal need analysis formula; one owned by a grandparent is even better because it is not used in the federal need analysis formula.
- Retirement Plans: Don't use retirement funds to pay for college expenses. They are not counted in the federal need analysis formula. If possible, use liquid assets such as cash in savings accounts first. This will reduce the amount of assets reported on the FAFSA. If you need money from your retirement fund, it is wiser to borrow from the retirement fund, if possible, and avoid any penalty from withdrawing money from the fund.
Excerpted from Financial Aid for the Utterly Confused by Anthony J. Bellia. Copyright (c) 2007 by The McGraw-Hill Companies.
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