Maximizing next year's financial aid for college
A few weeks ago, I outlined several financial moves to make now that could help increase the financial aid for your student this year.
Since most folks need financial aid for college costs each year, it can also pay to think about financial planning now: Doing so can increase financial aid when you complete and file the FAFSA, or federal financial aid application, in future years.
The concepts here are simple enough: use financial strategies that can reduce your base year income and reduce includable assets. If your base year income is lower, you could be required to make a lower expected family contribution towards college costs and therefore receive more financial aid. In regards to includable assets, an important concept to keep in mind is that depleting assets held by the student first can help to increase financial aid in later years. That's because assets in accounts owned by a parent for a dependent student are reported on the free application for Federal Student Aid (FAFSA) as a parental asset. Parental assets are assessed at a maximum 5.64% rate in determining the student's expected family contribution. For assets owned by the student, a higher percentage of assets, 20%, is required to be used towards college costs.
But making financial moves takes planning so you'll need to think ahead, as making a few well-timed financial moves can help to decrease your expected family contribution and increase your student's eligibility for some federal financial aid programs such as federal loans and work study programs.
Financial strategies to make this year that could increase financial aid when you file the FAFSA in the following years can include:
Maximize retirement plan contributions. Since assets in retirement accounts are not includable, making the maximum contributions to 401(k) accounts this year and using your savings outside retirement accounts to pay for living expenses is a viable strategy to reduce includable income and assets.
Spend student's assets first. If you feel that the student's assets should be used towards education costs (which was probably the purpose of these savings in the first place) then use up all of the student's assets towards college costs this year, before using any of the parent's assets.
Minimize taxable income. Think twice before selling investments in taxable accounts. Realized capital gains on investment sales are included income. Avoid taking taxable withdrawals from retirement accounts and delay exercising stock options. Also, if your employer offers one, use a nonqualified deferred compensation plan to defer any bonus income until a later year, if possible.
Delay gifts to student. Ask family members to hold off on making monetary gifts directly to the student. Instead, make gifts after graduation, which the student can then use towards paying off student loans, etc.
Parents and their students will find that the financial aid process is full of complexity and opportunity. Reading guides like this will help you and your student make the most of it.
