Financial Aid News and Information
13 Ways to Get More Dollars
for Your Scholar
"You can increase the financial assistance available to your college-age kids with a few simple steps. So minimize the income and the assets that 'count', keep cash out of junior's name and, if possible, send all the kids to college at once."
- Jennifer Mulrean
Attending college orientation for his son once prompted humorist Dave Barry to advise parents of college-age children to ask this important question: "Is there a bank near the college that you can rob to pay the tuition?"
OK, robbery may not be the safest or even most reliable
source of cash for college. Even Dave Barry knows that. Thankfully,
there are legal ways to lay your hands on college cash: Families
received a record $68.4 billion in financial aid for the
1999-2000 academic year, according to the College Board.
Most of that was awarded in the form of federal loans and
grants.
Qualifying for federal aid, of course, means first filling out the dreaded
Free Application for Federal Student Aid (FAFSA). (You can get to an online
version of form at left.) This is the form that most financial-aid officers
use to compare your family's finances with what your child's colleges of choice
cost, before calculating your expected family contribution (EFC). (If your
child is applying to private colleges, you may also need to fill out the CSS/Financial
Aid PROFILE, a form administered by the College Board, a nonprofit membership
association.)
A few key steps taken the year before filling out the FAFSA can go a long way toward accurately portraying the money you have -- or don't have -- and getting the aid you really need. But three strategies in particular can help your chances, says Mark Kantrowitz, publisher of the FinAid Web site.
- Save in the parent's name.
- Increase the number of children in college at the same time.
- Reduce your income.
To that list, we add one more: reduce your assets. That is, reduce the appearance of your assets by moving money into accounts financial-aid officers won't touch, such as retirement accounts, or by paying down debt. (For a list of 13 tips, click here .)
Save in the parent's name
Many parents set
up accounts in their child's name to build up college funds.
Kantrowitz's advice: Don't.
Financial-aid officers generally expect 35% of a student's assets to be used
to pay for college, compared with a maximum of 5.64% of the parents' assets.
Thus, if a child has $10,000 in a passbook savings account, she would be expected
to contribute $3,500 toward college, while a parent with the same account would
be expected to use only $564.
This assumes you actually have more than $35,000 to $60,000 in assets, which
is the asset range generally sheltered by financial-aid formulas, depending
on the age of the older parent. If you have less than this, reducing your assets
likely won't affect your eligibility. Also, colleges will generally ignore
your assets altogether if your household adjusted gross income is less than
$50,000 and all family members file IRS Form 1040A, 1040EZ or are not required
to file.
Many parents are tempted by the tax benefits of the Uniform Gift to Minors
Act. The act allows each parent to make an annual gift of $10,000 to a child
without paying any gift taxes. The child, who is usually in the 15% tax bracket,
will only pay taxes on the interest earned and nothing on the original $10,000
gift. For a parent in the 28% income-tax bracket, this "saves" 13%
in taxes on the interest income each year.
However, financial-aid rules will not only expect the student to use 35% of
the original $10,000 gift toward college, most colleges will also count 50%
of the income from a child's savings or investments.
Thus, it may be best to ask generous grandparents to withhold any gifts of
college money until the student completes college. This way, their gift won't
reduce the student's aid eligibility but will still help pay for college by
reducing or eliminating outstanding loans.
That's fine, but what if you stamped your child's name on a college savings
account years ago? Then, BEFORE filling out the FAFSA or Profile forms, use
the child's money to pay for items she'll need at college, like a computer.
In fact, especially in this situation, the operating rule should be to spend
your kid's money before touching any of your own, Kantrowitz says.
Just don't use the money on "parental obligations" -- food, clothing and
shelter.
It's off to college we go
If you have more
than one child of college age, you're in luck. "The
more kids in college, the less money per child the parents
are expected to contribute," Kantrowitz
says.
Until recently, parents could enroll in college at the same time as their
kids and thereby increase financial-aid eligibility. But private colleges
began eliminating parents from the calculation a few years back, and the
federal formula stopped counting parent-students with the fall of 2000, says
Kalman Chany, co-author of "Paying for College Without Going Broke" and
president of Campus Consultants, a New York firm that works with families to
find enough financial aid for college. "It's the number of dependent children
in the household that are attending post-secondary schools that counts."
It's now entirely up to the school whether any allowances will be made for
families where parents and children are simultaneously pursuing college degrees,
but it's still worth bringing up with a financial-aid counselor, says Janet
Cantelon, assistant director of student financial aid at the University of
Washington.
The financial-aid benefits of having more than one dependent child in college,
however, are readily apparent. Chany offers this hypothetical example: Assume
the parents of one student in college are expected to contribute $10,000 and
the child is expected to contribute $1,500, for a family total of $11,500.
With two children in college, the expected parental contribution is split between
the two children, so the parents would pay $5,000 per student and each student
would pay $1,500; the family contribution would be $6,500 per student. (Chany
cautions this is slightly simplified, as the federal formula would likely increase
the parental contribution slightly.)
This year's income, next year's tuition
Financial-aid
rules create one of the few situations in life where you
may want to reduce the appearance that your income is high.
That's because the basic financial-aid formula calls for
you, the parent, to contribute up to a maximum 47% of your "available
income" to your child's cause. (That
may well be what prompted Dave Barry's question.) This available income is
basically your adjusted gross income plus any untaxed income, such as tax-deferred
contributions to your retirement accounts, minus some allowances like federal
and Social Security taxes paid. Kantrowitz doesn't advocate deceiving financial-aid
officers about your income, but he does advocate being wary of any one-time
boosts this year that can reduce your aid eligibility for the next year.
If you're up for a bonus at work, for example, try to get it during a year
that won't reduce your aid eligibility. This means taking it before January
of your student's junior year in high school, or after January of your student's
last year of college. Don't forgo bonuses when the timing doesn't comply with
this outline, but consider asking for other perks that don't add to your income.
Also try to avoid generating large amounts of capital gains from your investments
during a year you'll be applying for aid. Or, if possible, offset them with
losses. That way, your bottom line won't be artificially pushed up.
Reduce assets
One of the most important things to consider
before filling out the FAFSA is paying down consumer debt, such as credit cards
or car loans. Schools don't count consumer debt against your assets, so it's
best to use savings to pay it down or eliminate it entirely. If you have $25,000
in a nonretirement savings account, for example, but owe $10,000 in credit-card
debt, you'll still be expected to fork over 5.64% of that $25,000. If you spend
$10,000 getting rid of the cards, your contribution drops from $1,410 to $846.
If you're applying for aid this year, you can also reduce your cash assets
in time to affect eligibility by accelerating expenses you'll have to pay next
year anyway. These may be business-related or could include big-ticket items
like a car, provided you're not going to acquire a loan in the process (see
item above). Kantrowitz notes that cars, boats and college supplies are generally
not included in the assessment of your assets. Neither are retirement accounts,
though tax-deferred contributions you make throughout the year are included
as nontaxed income. (Contributions to Roth IRAs and nondeductible, traditional
IRAs are not considered part of untaxed income, however, because they don't
reduce your adjusted gross income.) It's the money you can manage to sock away
in your retirement accounts the year before filling out the FAFSA that can
really help.
A final note
If you're the parent of a high school sophomore and are still a year off from applying for financial aid, you're in luck. You have the best shot at implementing these strategies in time to affect your financial picture for your first "base year," the calendar year before your student's college attendance. This is what financial-aid officers look at when determining aid eligibility. It works like this:
- If your child is going to college in the fall of 2004, your base year started on Jan. 1 of this year and will end on Dec. 31.
- If your student is a high-school sophomore this year, your base year will be calendar 2004.
So this is the year to take any capital gains and bonuses,
maximize your retirement-account contributions and use savings
in your child's name before touching your own. You also can
start reducing your cash assets by paying down consumer debt.
If you're the parent of a high school junior or senior, or even one who's entered
college, you have to apply for aid every year, so these strategies can still
help. But Kal Chany points out that they may be more difficult to implement
while your child is attending college.
"To pay the college bill and pay off consumer debt at the same time is going
to be difficult for most families," Chany says.
Finally, if an unusual situation arises that affects your ability to meet the
expected contribution, explain the circumstances to a financial-aid officer.
Maintaining a high college grade-point average can only help your chances
for getting more aid in subsequent years of school, Chany says. "The thinking
is that if you're doing well in school, you're more likely to make good money
when you get out," making you a better bet for loans, he says. "It's
not all motivated by altruism."
FinAid's tips on maximizing your eligibility
- Save money in the parent's name, not the child's name (because the need-analysis formula assumes a greater percentage of the child's income would be used toward tuition)
- Pay off consumer debt, such as credit-card and auto-loan balances.
- The more children in college simultaneously, the more aid will be available to each.
- Spend student assets and income first.
- Pay necessary expenses early to reduce available cash. For example, if you need a new car or computer, buy it before you file the FAFSA.
- If you feel that your family's financial circumstances are unusual, review the situation with the financial-aid administrator at your college. Sometimes the school will be able to adjust your financial-aid package to compensate using a process known as Professional Judgment.
- Minimize capital gains.
- Maximize contributions to your retirement fund or accounts.
- Do not withdraw money from your retirement fund to pay for school. If you must use this money, borrow from your retirement fund.
- Minimize educational debt.
- Ask grandparents to wait until the grandchild graduates before giving them money to help with their education.
- Trust funds are generally ineffective at sheltering money from the need-analysis process and can backfire on you.
- Prepay your mortgage.
Financial Aid Advisor
» More Financial Aid News
» Financial Aid Advisor