In 1974 the typical American family earned $13,000 a year. Enrollment in a private college cost $2,000 annually, and students could attend public universities paying tuition of around $510 per year, or, 4% of a family’s income.
Today, the median family income is $64,000. However, the cost of a private university is three times as expensive, even after inflation considerations, costing an average of $31,000 annually. Public college tuition increased four times over the same period to $9,400 annually or 15% of a family’s income..
Without the assistance of financial aid, attending college may be out of reach for the average family.
Financial aid packages offer both free and borrowed funds and begin with the FASFA. Use the following strategies to maximize FAFSA eligibility, giving you a better opportunity to receive the financial aid needed to attend the school of your choice.
Lower Expected Family Contributions (EFC)
The expected family contribution is the amount of out of pocket costs a family must pay for schooling, after considering all sources of assistance, including both free and borrowed aid. The ETC is the starting point to determine out of pocket costs each year.
The FASFA uses taxable income as the benchmark for determining aid eligibility. Postponing bonuses, increasing contributions to tax-deferred retirement accounts, and other income reduction strategies can lead to qualifying for additional money for school.
Private schools may use the institutional formula rather than the FASFA to establish the family contribution.
Move Custodial Accounts Out of the Child’s Name
The key to improving financial aid is to have the parent listed as the account owner, not the child. Gifting money to the student will result in assets calculated at the higher percentage.
The FASFA expects children to contribute money from cash accounts, such as checking and savings accounts, at a higher percentage than parents. Therefore, maintaining savings in the parent’s name can raise the eligibility for financial assistance.
A 529 College Savings Plan is an education account operated by educational institutions or the state with tax benefits when using funds towards higher education. The 529 acts as either a savings plan or a prepaid tuition program.
The Coverdell Education Savings Account is similar to a 529 account, but in the form of an IRA. It was created to encourage families to save for future education expenses, and, grows tax-free if used to fund an education at a qualified institution. Parents can use funds for primary, secondary school or college expenses.
Choose the Submit Date Carefully
The FASFA considers the assets of both parents for married couples, even if one is a step-parent. The asset value reported is the balance on accounts the day of filing. Submitting the FASFA prior to obtaining assets will improve the financial aid package.
Minimize Capital Gains
Capital gains typically refer to stock, bonds, or real estate, but can also include vehicles, collectibles, jewelry, or precious metals.
Selling assets without holding them for 12 months or more result in short-term capital gains taxed as ordinary income, increasing the AGI, which the FASFA uses to determine income. Holding investments for more than a year, not only receives a more favorable tax rate, but can improve the financial aid package.
Some assets held in the parent’s name receive protection from the FASFA formula including retirement assets, the value of the primary residence, the value of a small business operated by the family, and up to $45,000 in investments.
Selling the primary home typically results in tax-free income, leaving the family with gains not considered in the FASFA formula.
Tips to reduce capital gains include the following:
- Sell in a year of low income
- Hold an investment at least one year to avoid short-term capital gains.
- Sell losses to reduce net gains for the year, reducing taxable income.
Reduce Available Cash
Children earning over $6,260 per year could also receive less financial assistance. Purchasing technology, laptops, and other school needs before filing the FASFA lower the student’s resources.
Unusual Circumstances Call for Professional Judgement
If there are unusual family circumstances, speak with the financial aid administrator at the preferred school to look over the case. Some schools use their own formula in addition to the FASFA for a final determination of aid. The school can adjust the financial aid package to compensate.
Focus on Getting the Most Money
Admission decisions are separate from financial aid. However, the departments often work together for students in need. It is not necessary to have a final decision on the school before filing the FASFA. All schools require the federal form and can adjust aid allowances based on the total cost of attendance. Rather than focus on the school choice, get the highest award possible.
Qualifying for a strong financial aid package is the only way many children can afford the cost of college. A shortage of free aid can lead to higher loan balances and parent loans to pay for school.
Schools typically award financial aid on a first come, first serve basis. Filing the FASFA early can increase the amount of free aid received.
Tuition and expenses for higher education continue to climb well above the rate of inflation. Getting the highest level of aid can qualify the student for more grants and scholarships, lowering the amount they must borrow while earning a degree.