The Basics of Student Aid
Maximizing your child’s financial aid will go a long way to helping you afford a college education. The first step is to fill out a Free Application for Federal Student Aid (FAFSA), which can be downloaded at www.fafsa.ed.gov. In order to ensure that you’re getting the most out of the system, you’ll need to start planning early. Because the Estimated Family Contribution (EFC) plays such a large role in determining the amount of aid you’re child is eligible to receive, it is beneficial to parents to consider ways to increase the difference between the cost of college and the EFC.
Do You Qualify?
Don’t let the idea that you won’t qualify for aid dissuade you from applying. You may be surprised as to who is actually eligible to receive a helping hand. There is a lot of misunderstanding around the subject that has kept some families from getting the support they need—and that’s the key word “need.” If you can demonstrate need by showing the contribution you will be providing for your son or daughter is less than the cost of attending college you can qualify for aid. The Expected Family Contribution is calculated with the information a student provides on their FAFSA. The data about income, assets, size of family, and number of family members in college is used to create a Student Aid Report (SAR). This identifies the amount of money that a student’s family or even the student is expected to provide for college.
Going Home
When you think of assets your mind may immediately conjure up an image of your house as it is often the single largest asset for a family and owning a home, and particulary a high value home, is one reason some families think they are unqualified for federal financial aid. But the good news is your primary residence does not count as an asset; so regardless of how much your house is worth—it won’t factor into the EFC calculation.
For those of you who have just taken out a home equity loan, keep in mind any leftover monies that have not been spent on home-related expenses will influence your needs analysis. A home equity line of credit avoids this pitfall, since you are only drawing down for specific expenditures and the equity you are drawing from is still in the home.
Retirement Plans
The value of your investments in a federally-approved retirement plan like a 401(k) or IRA also do not count as assets when considering need. However, your pre-tax annual contributions to these plans will count as part of your income. In addition, if you’ve been thinking about taking distributions from your retirement account to help pay for your child’s education, you may want to reconsider. Distributions from 401(k) or IRA plans are considered income and will influence your needs-based analysis. It is recommended that if you wish to take funds from these accounts borrow from them, since it is simply a loan that you will be paying back to the account.
Need to Know
What the Feds really want to know is your income from last year and your investments, which includes savings, securities, and investment property. You may be asked to provide U.S. income tax returns. If you haven’t filed yet you can provide estimates. It’s recommended that you apply for financial aid as early as possible, so that means estimates of income taxes may be all you have.
Another important point to remember is that the form is looking at both the parent and student’s income. If your son or daughter has earned over $3,750 in after tax income between January 1st of their junior year and December 31st of their senior year, their financial aid will be reduced. This is called the income protection allowance for dependent students. A student’s aid will be reduced by 50% of the income earned above the allowance.
The More You Need
If your son or daughter is considering a private school and you were concerned that it would cost the Earth, think again. Remember that your financial aid is based on the difference between the EFC and the cost of college. So the costlier the school the more of a need is demonstrated. Because of this, many private institutions offer more in the way of financial support and may provide a better deal than a public institution, which tends to have limited resources. Parents may also want to look into paying off debts, making major purchases, paying off the mortgage, and maximizing post-tax contributions to a retirement fund before a child is headed to college in order to maximize the family’s need. And if you have ever considered going back to school to get a second degree now is the time. You can qualify for more aid if you have more family members enrolled in college. Keep in mind, you may need to prove that this is a legitimate educational objective, so make sure it’s genuine.
Making a Plan
It has become a tradition for parents to start college savings accounts under their child’s name, but this may not be the most advantageous set-up when it comes to receiving financial aid. Children are expected to contribute 20% of their assets to schooling (as of July 2007) and parents are only required to contribute 5.6%. That means, the more kids have, the more they have to contribute and that translates to less financial aid. There are alternatives to setting up a savings account for your child, including the 529 Plan, which is considered a parent’s asset (with the child as a beneficiary) and therefore doesn’t reduce the financial need of the student. Though it will be included as an asset of the parent and is subject to the 5.6% contribution amount. There are also 529 prepaid tuition plans that enable parents to buy their child’s future in-state public college tuition at the present day price. The money in this plan is free from federal tax and often has some state tax advantages (depending on the state). It’s a safe investment that’s guaranteed to match any increases in tuition. These vehicles usually outperform CDs and regular savings accounts; however, they are restricted to in-state schools and may also have strict rules on what constitutes college spending.
Summing Up
Although there are numerous ways to handle your finances to ensure you maximize your aid package, demonstrating a need is at the heart of the financial aid process. This entails adjusting your income, assets, and contributions to retirement accounts among other steps. Head to www.fafsa.ed.gov to download the application and get the proverbial ball rolling. You’ll also find plenty of resources on the site to help guide you through filling out the application. Remember, the deadline for 2009 is June 30th, but we advise you to apply much, much earlier. Use estimates for your tax returns if necessary, and talk with a financial advisor if you have a more complicated financial situation. i.e. trusts, gifting, etc.
