It’s important to understand the basic rules because the financial aid system has perversely punished millions of conscientious parents.
Two families could enjoy the same income and net worth and could
have saved the exact same amount for college, but one could snag a fat
financial award, and another could walk away with nothing but loans.
If you’re puzzled about how you play the game, here are practical
steps you can take to boost your chances of receiving a free handout:
Watch your financial footprints. Many parents assume that
colleges aren’t going to care about their family finances until their children
are seniors in high school. That, however, is a dangerous assumption.
You need to be mindful of any financial moves you make from
sophomore year in high school through the senior year.
Schools are going to focus on your family’s finances in the socalled
base year, which refers to the calendar year prior to the year
your child starts college. The base year for a child entering college in
the fall of 2010, for example, would be 2009.
During this time period, you want to be extremely careful to
avoid—if possible—any financial transactions that will jeopardize
your chances at aid. Of course, if you’ve got a zero chance of qualifying
for aid, you can ignore this advice.
Your aim should be to minimize the appearance of assets and
income in this critical year. There are plenty of legal ways to pull this
off. If you have credit card debt or a car loan, for instance, you may
want to pay it down earlier than you’d contemplated. You could also
contribute more to a retirement account. By doing these things, you’ll
have less cash on hand when financial aid officers start snooping. If
you expect a year-end bonus, ideally you’ll want to get it before the
base year starts.
Once you’re in that crucial base year, it’s best to avoid selling profitable
mutual funds, stocks, and other investments. The aid formula
counts investment profits as income.
Don’t touch retirement accounts. As long as the money stays
in a retirement account, the vast majority of schools aren’t going to
care how much you’ve saved. You could have $5 million stockpiled in
retirement accounts, and it wouldn’t hurt your chances for financial
aid. Some private colleges, however, may factor in your retirement
accounts when calculating financial need. Any college or university,
however, will take note if you tap into your retirement nest egg. Withdrawals
from retirement accounts are considered income.
Another no-no is converting a traditional Individual Retirement
Account (IRA) into a Roth IRA in the base year. Although a Roth conversion
can make perfect sense as a retirement strategy, it could be a
disaster if you’re angling for financial aid. That’s because the money
that’s moved from a traditional IRA into a Roth will be considered
income.
Don’t let up. Okay, you might be wondering what happens if you
do all this for one year. Don’t you need to file for financial aid at least
three more years? That’s true. The financial aid calculations are done
annually, but the initial calculation can make the biggest impression.
That said, you will unfortunately face the same challenges every year.
Ideally, you’ll want to use the strategies to obtain financial aid until
roughly April of your child’s junior year in college. By then you will
have submitted your last financial aid application.
Pay attention to where the college money is kept. Unless you
know that financial aid is an impossibility, be careful about where you
stash the cash. That’s because financial aid formulas treat children’s
assets far more harshly than the money that’s in mom and dad’s name.
It’s easy to argue that treating one pot of money dramatically differently
from another just because it’s in a different type of account is
ridiculous. After all, we’re talking about one child’s education whether
parents saved the money or the child tucked away money from
babysitting or cutting the lawn. The system is even more infuriating
because the financial aid rules regarding various types of accounts
keep changing. Imagine striking out the last batter in the World Series
only to be told that it now requires four strikes to retire the hitter.
That’s what parents are up against.
So what are the rules? If you’re going to qualify for financial aid,
it’s typically best to have the college money sitting in parental
accounts. In the federal formula, the parents’ assets will be assessed at
no more than 5.64%. In contrast, a child’s money will be assessed at
20%. Any cash sitting inside a custodial account belongs to the child.
The most common custodial accounts are the Uniform Gifts to Minors
Act (UGMA) and Uniform Transfer to Minors Act (UTMA).
Consider moving custodial cash. Luckily, there are ways to
legally move cash out of custodial accounts. You don’t have to wait
until college to spend money in a traditional custodial account. You
can dip into a custodial account to pay for summer camp, tutoring, or
anything else that doesn’t fall into the category of household needs
such as the mortgage or food.
Parents can also transfer custodial money into a custodial 529 college
plan. Custodial 529 accounts were traditionally treated like any
other custodial cash for financial aid purposes, but no longer. Money
in these accounts has absolutely no impact on financial aid calculations
until July 2009. Starting July 1, 2009, custodial 529 plans will be
reported as a parent asset if the student is a dependent.
Be an early bird. Imagine billions of dollars of financial aid
money sitting in a feed trough, and you’ll be able to appreciate why it’s
important to show up for breakfast early. It’s a reality that each year’s
supply of discretionary financial aid will disappear. If many stellar kids
apply months before you do, you might walk away only with loans
because nothing else is left.
So what’s early? You should file the FAFSA as soon after January
1 as possible, which is when the form becomes available. It’s best if you
file this form electronically because the software automatically detects
common mistakes.
You may also have to file the CSS/Financial Aid PROFILE, the
financial aid form used by hundreds of private schools. The PROFILE
asks many of the same questions posed by the FAFSA, but it delves
deeper into a family’s financial picture. The PROFILE is available in
October for the following year’s freshman class. So if your child begins
college in September 2009, you could fill out the form as early as
October 2008.
To answer many of the questions on both the FAFSA and PROFILE,
you’ll need to pull numbers off your tax return. That’s why it’s
critical to complete your tax return as soon as possible after January 1.
You don’t, by the way, have to file your tax return that early, you just
have to have completed it and signed the document.
Of course, tackling taxes that early will seem impossible for many.
After all, plenty of people may not get their W2 forms from their
employers until mid January. Self-employed parents can have it even
tougher since their tax returns can be more complicated and require
gathering many more documents.
Luckily, there is a solution to this problem. You can file an estimated
FAFSA. Because you’re estimating the numbers you’ll plug
into the FAFSA, you should expect the schools to ask you for your
signed income tax returns after it’s filed. This approach also works with
the PROFILE.
Pay attention to deadlines. If you miss a school’s deadline for
financial aid, your aid application might never be reviewed. Overlooking
a financial aid deadline can be worse than missing a mortgage payment.
Ask schools on your child’s list about their financial aid dates.
Play the divorce card. In key ways, financial aid formulas treat
the student of divorced parents differently. As far as the FAFSA is
concerned, the noncustodial parent is irrelevant. The financial aid
document doesn’t even pose any questions about the other parent.
The PROFILE does ask about the noncustodial parent, but the information
is not taken into account when figuring a family’s ability to pay.
Ivy League schools do look at the noncustodial parent’s assets and
income when making aid decisions.
What can jeopardize a student’s chances of walking away with
financial aid is the remarriage of a custodial parent. The formula takes
into account the assets and income of the stepfather or stepmother.
Some newlyweds use a prenuptial agreement to try to block this, but
they aren’t successful.
Action Plan
To boost your chances of financial aid, you need to start planning
well in advance of your child’s high school graduation.
Source: The College Solution: A Guide for Everyone Looking for the Right School at the Right Price
