While your child may be stressed out applying to college during his senior year of high school, you may actually be more anxious filling out financial aid forms.
Indeed, the financial aid process, especially preparing the Free Application for Financial Aid (FAFSA), can be overwhelming. But you can alleviate stress by getting your financial house in order long before your child’s senior year. To better prepare for and tackle the financial aid process, take a look at our top five tips:
1. Plan to submit the FAFSA
This is a must, even if you think you won’t be eligible for financial aid. The FAFSA helps determine whether your child receives Federal grants, student loans, work-study and even private scholarships. Starting with applying to school for the 2017/2018 year, you’ll be able to submit the FAFSA as early as the prior October instead of the January deadline in previous years. This means that for college entry in 2017, you’ll report your 2015 completed tax return as well as any assets you or your child holds at the time the FAFSA is submitted. This also means you’ll have to plan ahead as your income during Junior’s sophomore and junior years is what will be reported. Filling out the FAFSA will calculate your expected family contribution, or EFC. As this isn’t always the true amount you can afford to contribute to college, read on to see what you can do to maximize your aid package.
2. Stockpile cash into retirement accounts
Funds held in 401(k) and IRA accounts do not have to be reported as assets on the FAFSA. So, shifting money from taxable funds and savings into retirement accounts during the years prior to filling out the FAFSA can lower your EFC. With this said, only do this if you can afford it as it’s not a wise idea to dip into your retirement funds to pay for college, says Jill Marr, manager of client services administration at American Student Assistance (ASA).
Not only are there often penalties for withdrawing money early but "your kids won’t thank you when they have to support you in your old age," says Marr.
3. Shift assets out of your child's name
Your child is expected to contribute 20 percent of his assets toward college. You are only expected to chalk over about 12 percent, according to Marr, who also spent 15 years as a college financial aid administrator. The only exception to this is a 529 college savings account, which is considered a parental asset even if it’s in Junior’s name. To avoid the higher expected contribution percentage, you can move Junior’s savings and assets into accounts in your name or a 529. Another perfectly legal tip: Consider gifting Junior’s money to a grandparent or someone else and this way you can move the funds out of your family accounts entirely. You can gift up to $14,000 a year per person without paying taxes. The one caveat: Be sure you trust the person you give the money to so that you’re confident Junior will get it back.
4. Pay off your debt
Your savings and other assets are counted toward your EFC, so why not deflate this amount while paying off your existing debt? For example, if you have a car loan or credit card debt and you have money in a savings account earmarked for Junior’s college, you can use this to pay off that debt, reduce your available savings and hopefully boost your financial aid package. Another perk of paying down debt: It will likely improve your credit score, making it easier to borrow money in the future, says Marr.
"It’s best to be prepared and have options. Students have limited ability to borrow and you shouldn’t assume your child will be able to borrow enough money on his own," she says.
5. Do your best to minimize income
When it comes to the FAFSA, minimizing your income is key. In fact, your income weighs more heavily in the FAFSA eligibility formula than your assets. For this reason, you should time any income shifts wisely. For example, hold off on selling mutual funds or exercising stock options as this may boost your annual income. Likewise, capital gains from the sale of a house could balloon your yearly income even if you plan to invest the money or use it to pay for college, says Marr. If you can’t get around an income boost, you can file an appeal with college after Junior is accepted. This way you can explain the situation to the financial aid department. However, in order to avoid the hassle and possible disappointment of being denied aid, it’s best to avoid this scenario during Junior’s high school years.
Image: Daniella Urdinlaiz