Maximizing your eligibility for need-based aid
You likely vowed to start planning for your son or daughter’s education back when he/she was only a baby. Your intention was to open up a 529 Plan and stash away a little extra cash each month until it matured into six-figures. With that money plus an athletic scholarship—I mean, your kid was a peewee soccer MVP at the time—you would be sitting pretty by the time it came to pay that first tuition bill. Unfortunately, life got in the way of these best laid plans, and now you’re scrambling for practical short-term advice on how to finance the education of their dreams.
Unless you happen to stumble upon a 1985 Delorean fully-loaded with a flux capacitor (in which case you should pull a Biff, bet on future sports events, and not even worry about financial aid), you’re not going to be able to go back in time and execute that long-term savings plan. But that certainly doesn’t mean that all is lost. Space-time continuum transcending scenarios aside, here are some essential short-term strategies for maximizing your federal aid.
1. Fill out the FAFSA!
For those with significant financial need, the federal government continues to be the largest source of student aid. Each year the government awards upwards of 70 billion dollars, money that comes in the form of Pell Grants, work-study programs, and educational tax breaks. Additionally, the feds loan out 110 billion with far more favorable terms than private lenders. That’s 180 billion dollars handed out each year for higher education, a sum greater than the Gross National Product of all but 60 countries in the world. The bottom line is that there is a substantial amount of federal money available for college and it is worth your time to at least fill out the FAFSA.
This seems like obvious enough advice, yet each year over one million families fail to file a FAFSA solely because they do not believe that they would meet the income requirements for aid (hundreds of thousands of others fail to fill out the FAFSA for other reasons). This includes many middle-class families who, due to the funky, almost nonsensical formula for awarding aid, may have actually received an award had they simply taken the time to complete the form.
2. Understand how “income” is calculated
Under the new FAFSA process (instituted October, 2016), your income will be based upon your tax records from two years prior to the year your child sets foot on a university campus. If your teen will be entering college in 2017-18, your reported income will be for the calendar year 2015. While it’s too late to adjust already reported income, those with current high schoolers who are still two to three years away from the process can still take steps to minimize their taxable income for the calendar year upon which the calculation will be based.
Certainly, it would not make any financial sense to go to extreme measures to reduce your income such as quitting your job or refusing a raise. However, if you are due to receive a lump sum payment during that timeframe such as a company bonus or retirement/pension account withdrawal, you may want to look into deferring the receipt of that money until you are outside the aforementioned window of time.
If your net income falls below the $50,000 mark, money that you have in the bank or a brokerage account will not be held against you. If you’re income is below the 40k mark, you’ll have a great chance to qualify for federal grant money regardless of your assets, liquid or otherwise.
3. Move assets out of your child’s name and into your own
Now, we’re not advocating going all Macaulay Culkin’s dad on your kids and spending their summer job earnings on a bedroom Jacuzzi. This one actually comes down to simple math. Within the EFC formula, your assets are calculated at 5.65% while your child’s assets come in at a far heftier 20%. In other words, for every $1,000 in your son or daughter’s bank account, your EFC will increase by $200. If that same $1,000 was in your name your EFC would only increase by a little more than 50 bucks.
4. Use savings to pay down debt
Now that you have a better understanding of the EFC, you can imagine why it would be beneficial to take any money that you have in savings and use it to pay off credit card debts, auto loans, or even to prepay your mortgage. The world of financial aid punishes you for having large stacks of available cash and does not reward you for having a massive, high-interest credit card debt. Thus, paying off debt before submitting the FAFSA can kill two birds and greatly improve your chances of getting more aid. It may just be the most lucrative shifting of funds you can do not involving the Cayman Islands and a banker in sunglasses and a white suit.
5. Be the earliest bird you can be
Finally, we recommend submitting your FAFSA forms as soon as possible after October 1st—to maximize your eligibility for federal, state and institutional aid—so if you considering any of the above financial moves, move as quickly as possible.
You may be 1.21 jigawatts short of turning back the future, but if you heed our short-term advice, there is still time to see if Uncle Sam can help cover the cost of your child’s college education.