“student Loans And Fafsa: Maximizing Federal Financial Aid” – Maximizing college aid eligibility for your child can be overwhelming and difficult to navigate. From lowering your “appreciable assets” to considering Roth IRAs for summer jobs, here are Planning to Wealth’s eight effective college financial aid strategies to get the most help out of your child’s FAFSA.
1. Roll custodial accounts such as UTMA/UTGA accounts into 529s. This will lower the effective family contribution (EFC), since custodial accounts are treated as student assets, while 529s are treated as parental assets. Student assets are included in the EFC formula at 20% to 25%, while parental assets are included at only 5.6%. To maximize financial aid, you’ll probably want to avoid custodial accounts altogether.
“student Loans And Fafsa: Maximizing Federal Financial Aid”
2. Use down the children’s assets for college expenses before the parents’ assets. Since children’s assets count more against you in the financial aid formula than parents’ assets, prioritize using assets held in the children’s names first. You may want to spend some of these funds on college guidance or computers ahead of the financial review years.
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3. Maximize savings in retirement accounts like 401ks and IRAs. Unlike money saved in your taxable brokerage accounts, money in your IRAs, 401ks and other qualified accounts does not count toward the EFC.
4. Pay debts to reduce mother’s assets. Using cash to pay off credit card debt, car loans, or to prepay your mortgage debt reduces your FAFSA’s “assessable assets” and results in a lower effective family contribution (EFC). Similarly, you may want to prepay for large expenses, such as a new car or computer, before you file the FAFSA. Be careful about selling investments to pay off debt and reduce assessable values; this can backfire as capital gains will increase reported income.
5. Be skeptical of advice to convert liquid funds into annuity/insurance funds. Since annuities and insurance funds are not assessable assets under the FAFSA, some product providers and insurance agents recommend a financial aid strategy for colleges to convert cash or brokers into annuities and insurance funds. However, it is possible that these conversions could cost you more in fees than the 5.64% reduction in EFC. Also, it is rarely a good idea to convert liquid assets into illiquid assets without increasing returns. You don’t want to end up in a situation where you’ve fundamentally changed your asset allocation and paid a large amount of fees to try to game the FAFSA, but then your child ends up not going to college anyway.
6. Consider Roth IRAs for summer jobs. If children are earning earned income through part-time and/or summer jobs, consider redirecting college savings from assessable assets such as 529s to non-assessable Roth IRA assets. Roth IRAs are wonderful college savings vehicles, whether opened by the parent or the child.
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You’ll have more investment options in a Roth IRA than a 529 account, and distributions from a Roth IRA used for qualified higher education expenses avoid the 10% early withdrawal penalty. Furthermore, distributions from Roth IRAs are principal, so you can withdraw the original Roth IRA contributions to pay for other expenses without being subject to taxation or an early withdrawal penalty.
7. For parents going through a divorce, structure the divorce settlement with student aid in mind. For divorced parents, the FAFSA will only look at the financial information for the custodial parent, the parent with whom the child lives for most of the year. To maximize financial support, parents may want to consider designating the lower-income spouse as the custodial spouse, since only the custodial spouse’s income and assets are considered by the FAFSA.
During divorce settlement negotiations, consider the custodial parent receiving non-assessable real estate (home) assets above assessable alimony for financial support purposes. Another financial aid strategy would be to consider delaying alimony payments until after the FAFSA assessment year. Many divorce agreements create educational trusts for the child’s education. This could be a mistake since the FAFSA will consider the trust as a student resource and potentially lower eligibility for financial aid.
For parents considering remarriage, they may also consider delaying remarriage until after the FAFSA assessment years. The new spouse’s income and assets will be considered by the FAFSA when the custodial spouse is remarried.
When To File The Fafsa To Get More Financial Aid For College
8. Coordinating contributions from grandparents to college. Encourage grandparents to redirect their gifts to college-bound grandchildren to the parents of the college student, which avoids the gifts being assessed as income to the student. The grandparents can also simply deposit assets into a 529, which are assessed at a much lower rate than outright gifts, or purchase non-cash items for the student’s education such as computers or plane tickets.
Often grandparents create educational foundations for students. To maximize eligibility for financial aid, it is preferable that the beneficiary of the trust is the parents rather than the student. Alternatively, grandparents can agree to pay off student loans after graduation.
Bonus tip: Complete and file the FAFSA early. The FAFSA opens on October 1st, which is three months earlier than it used to open. Since financial aid is first-come, first-served, you increase your chances of maximizing your college aid eligibility by submitting early. Since the tax year submitted for the FAFSA is an earlier year, your financial circumstances may have changed. Filing early gives you more time to inform the financial aid offices of any change in circumstances to potentially change your award for the better.
While maximizing financial aid is an important step in covering the cost of college, cutting the actual cost of college can have an even greater impact on your family’s financial health. Here are “14 Ways Families Can Lower the Cost of College Before Freshman Year.”
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David Flores Wilson, CFP®, CFA, CDFA®, CCFC is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Managing Partner at Sincerus Advisory. Click here to make an appointment to speak with us.
Planning to maximize college financial aid assets, how to get the most college financial aid, ways parents can maximize college financial aid eligibility, CCFCF financial aid is available from many sources and helps you afford to pay for your college degree. Find out how it works and how to apply.
This is why figuring out how to pay for college is one of the most important steps to take when thinking about getting a college education.
If you think a student loan is the only way to cover your education expenses, we have good news for you: The Department of Education (DOE) has over $120 billion (that’s $120,000,000,000!) in aid available to students.
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This guide will guide you through what financial aid is, types of financial aid, how financial aid works and how to apply for financial aid.
Financial aid (also called student aid) is money that a third party gives you to help you pay college expenses. An example of this aid is the $120 billion the Department of Education offers for qualified students.
While the DOE is the largest source of financial aid, other institutions such as government agencies, schools, and non-profit organizations also offer financial aid to qualified students.
There are two main types of student aid: free money and self-help funds (money you have to earn or pay back).
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Financial support, such as scholarships and grants, is a gift that you do not have to pay back under any circumstances.
This type of financial aid helps cover the costs of your education. To receive financial aid that qualifies as free money, you typically must demonstrate financial need or meet academic requirements (such as a minimum GPA or enrollment in a specific program).
If you meet the requirements of the organization giving you the free money (such as continuing your studies or attending college at least part-time), you do not have to pay back this financial aid.
“Self-help” financial aid is a type of financial aid that you must earn through work or pay back. You have to do something for that money. Examples of self-help financial aid are work-study programs, federal TEACH and military grants, and student loans.
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In the federal work-study program, you must work in an eligible job to receive financial aid from the government.
The two main types of student loans are federal student loans (loans issued by the DOE) and private student loans (loans issued by an institution other than the DOE).
If you receive free money (such as a scholarship or grant), you don’t have to pay it back as long as you meet the requirements. A common requirement is to be at school at least half-time.
If you receive self-help funding (for example, through a work-study program or a student loan), you will receive financial aid as long as you meet the requirements.
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A work study program requires you to find, apply for and secure a job that meets the program’s requirements, so that you can receive financial support. In the case of a student loan, you must repay the financial aid based on the terms of the loan.
Financial aid is cash that you receive from the state, a government agency, a school, or a private organization. Whether or not you have to pay back the money depends on the type of financial aid you received (free money vs. self-help).
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