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| The Basics | 13 ways to get more dollars for your scholar
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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.
By 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 $105 billion in financial aid for the 2002-2003 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; see link at left.)
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 childs name to build up college funds.
Kantrowitzs advice: Dont.
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 childs 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, youre 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 childs cause. (That may well be what prompted Dave Barrys 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 wont 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 2005, your base year is 2004.
- If your student is a high-school sophomore this year, your base year will be calendar 2006.
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.
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