Hopefully last week’s blog post helped you understand generally how financial aid works and when you should start doing what. This week, let’s dig into specific strategies and tactics you can use to maximize your child’s financial aid.
As mentioned last week, reducing income and then assets should get you the most bang for your buck (or buck for your bang, in this case).
For every year you’re going to apply for financial aid, you should try to reduce your income and assets in the “prior-prior” year. That means that once your (youngest) child is in the second half of her sophomore year in college, you don’t have to worry about it anymore. Feel free to get that gigantic bonus or million-dollar inheritance whenever you want after that…
Remember that there is a balance to be struck. You don’t want to jeopardize other parts of your financial life — by spending all your emergency fund cash, or by retaining inappropriate investments just so you won’t incur capital gains income, for example — just to increase your chances of financial aid. That is not a prudent trade-off.
Strategy #1: Reduce income.
- Contribute more to pre-tax retirement accounts, such as IRAs and 401(k)s. Contributing to an (after-tax) Roth account won’t help you here. If you usually make Roth contributions, consider switching to pre-tax contributions for a few years.
- Avoid selling investments at a gain during the relevant years.
- Do sell investments at a loss during the relevant years. (Again, only if it’s sensible for your portfolio.)
- Avoid exercising non-qualified stock options. The difference between the market price and exercise price counts as income the moment you exercise.
- Do not take money out of retirement accounts. These assets aren’t included in the EFC calculation. Also, money you withdraw from a pre-tax account will be income included in the EFC calculation, and depending on your age, you might get penalized for the withdrawal. Lastly, in most cases you should prioritize retirement over college.
- If grandparents are going to pay for part of college, do not give the money to the child. Give the money to the parent, or check with the college what effect a direct payment to the school would have. Consider waiting to use the money to pay off the child’s loans.
- Slated for a bonus or other one-time compensation? See if you can convince your company to give it to you outside a prior-prior year.
- Take an unpaid leave of absence. It makes no sense to forego income for a year simply to get more financial aid, because you’ll be worse off financially after that year. But if you were planning such a lifestyle change for other reasons, make it work for you.
- If you run your own business, consider recognizing expenses earlier and income later, lowering your current income.
- Don’t overstate family income on the FAFSA form. For example, when it asks for income, it means your Adjusted Gross Income, not your (probably higher) gross income.
- Minimize the income your child earns.
Strategy #2: Reduce “included” assets.
The fewer assets you have that are included in the EFC calculation, the more financial aid you should get. Retirement accounts are generally not included, but taxable investment accounts are, for example.
- Maximize your retirement plan contributions. Not only does this reduce your income in the case of pre-tax contributions (as mentioned above), but these accounts are generally not included assets.
- Use the 529 assets up first. They’re “included” assets so the smaller they are, the better.
- Spend student assets before parent assets. Even if your child starts her college career with assets in her name, use them up first so later years won’t include them.
- Turn the included assets into stuff you were going to buy anyways. If you are going to take a big vacation, or need to buy a new car, spend your money on them earlier because these items aren’t counted as assets, whereas the cash would have been.
- Pay off consumer debt, like credit card and car loans. That kind of debt isn’t advantageous in the EFC calculation, and paying them off reduces your assets, which is advantageous.
- Pay more on your mortgage. This converts included included assets into excluded assets (home equity). Please note that the CSS Profile does look at home equity, so this tactic wouldn’t help there. I’ve read suggestions that you take out a HELOC (tax-deductible interest, reduces your home equity) to help with the CSS Profile; I would tread carefully taking out HELOCs for anything but home improvement. I’d hate to put my house on the line in order to pay for anything other than my house. Home equity is going to be a bigger issue for those of you living in high-cost-of-living areas where your home value (and presumably equity) are higher than in the rest of the country. If your child goes to a FAFSA-only school, this can work in your favor!
- Small businesses owned and controlled by the family are excluded from the EFC calculation.
Strategy #3: For divorced parents, choose the custodial parent carefully.
It is the custodial parent who fills out FAFSA. The Federal government does not consider the income and assets of the non-custodial parent in determining a student’s financial need, although colleges who use the CSS Profile do. Please note that the term “custodial” does not mean legal custody. It means the parent the child has lived with most during the last 12 months. For FAFSA financial aid purposes, try to have the custodial parent be the one with the lower income and assets.
(Less helpful) Strategy #4: Maximize the number of family members enrolled in college at the same time.
The EFC is split among all household members who are attending college. If you have several children, the more enrolled in college at the same time, the more financial aid you will get. It’s also possible that if you, the parent, are going to school, that might help increase financial aid.
In general, I find this recommendation of limited use because, 18 years ago, you weren’t really thinking about financial aid when you asked “should we have a baby?” and Mother Nature sure as heck wasn’t thinking about that when she answered.
(Less helpful) Strategy #5: Change your child’s status from “dependent” to “independent.”
If a student is “independent,” then parents’ finances aren’t included in the financial aid calculation. Your child could be deemed “independent” by:
- getting married before submitting the FAFSA
- delaying college until age 24
Schools often have stricter requirements. Not really a strategy I’d pursue, but if your kid happens to get married or delay college for other, more personal reasons, then keep this in mind.
Remember! You have to evaluate these tactics in the light of your overall financial picture. You don’t want to put your investment portfolio at risk, or disrupt your business operations just to go after more financial aid.
Do you understand the specific tactics but are uncertain how to coordinate them with the rest of your financial picture? I can help. Reach out to me at email@example.com or schedule a free 30-minute consultation.
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