29 January 2006

Stuff You Oughta Know About Filing the FAFSA

This is actually Part II of a previous post. I know it was promised "tomorrow." I don't suppose you are willing to believe that today is yesterday's tomorrow?

I was talking about things you can do (legally and ethically) to reduce your EFC and increase your chances of getting a favorable aid award from colleges. What follows is a list (by no means complete) of some suggestions to help you do this. If you have any ideas of your own, please post them in the comments section. The advice included is that which should be considered for filing the FAFSA, and assumes their Federal Methodology. Some universities consider additional information not submitted on the FAFSA -- the more people game the system, the more colleges have to figure out a way to get the accurate picture they need to dole out their resources.

There are some key things to keep in mind. Analyzing this type of information is not something that most colleges are fond of. An argument can be made that these actions are designed to make wealthy people, who can theoretically afford to pay for college, appear "poor" to get something for nothing. I have yet to meet too many folks who can simply write a check to pay for college, and until those folks become the rule rather than the exception, I think it is a good idea to share some tips. Also, remember that these ideas are those of some guy you are reading on the Internet -- a guy who does have some experience dealing with these situations, but a random "guy" nonetheless. This advice should not replace talking with financial aid professionals at the schools you are deciding between (all schools' Financial Aid offices operate differently), your tax consultant, or a certified financial planner. If you want to know, keep reading...

Plan BEFORE You File
Filing the FAFSA is pretty much the same thing as taking a photograph of financial picture at that one specific date. Your income, assets, marital status, and all other circumstances are all static at that time. If you plan on following ANY of these suggestions, you will receive the most benefits by doing so BEFORE you file.

Reduce Your AGI
This doesn't sound like a good plan yet, does it? You might be thinking, "the best way for me to pay for college is to make LESS money?" Well, no. If you just want to "PAY" for college, then just make MORE money, and write the college a nice, fat check. Since that isn't likely to happen, maybe my idea has some merit. First, we are talking about "Adjusted Gross Income." There are ways to do this:

  • Increase contributions to your IRA to the maximum allowed. This is something that you can still do for the 2005 tax year. 2005 IRA contributions can be made up until April 15, 2006. If you are planning ahead, have your employer withhold a greater amount of your income for your 401k/403b contribution.

  • Minimize your capital gains. In most cases, capital gains are treated like ordinary income for the purpose of determining EFC. Try to schedule selling stocks for which you will have a large capital gain either before your child's junior year of high school (before the tax year for which you will be filing your first FAFSA) or late into your child's junior year of college (after the tax year for which you will be filing your child's last FAFSA). For tax purposes, you can use capital losses to offset regular income, but for FAFSA filing, this is generally not the case. You can, generally, use capital losses to offset capital gains, but you would do best to check with the college's Financial Aid Office to check first.

  • Postpone your annual bonus. Some companies will allow you to defer your annual bonus, some will not. It doesn't hurt to check. Since your child is likely to be in college for more than one year, this is really only delaying the inevitable. But, in the course of one year, you may be entitled to more aid, and you now have one more year of time to plan for next year.

  • Take an upaid leave of absence. OK...this one seems a little drastic, but if you were considering it anyway. Included in this suggestion is to reduce salary taken from your own business (works if you are a C Corporation). There will be an increase in the value of the business (an asset), but that usually has less negaive reprecussions than income or savings.

  • Reduce Your Savings
    Now that I've got you making less money, you should also spend frivously that which you have saved until now. Ummm...no. But, the two things that are considered above almost all else in determining eligibility for financial aid are the parents' income and assets. The first asset that is called upon in determining EFC is cash on hand -- money in your savings. Making that number lower is one way to increase eligibility for aid. How to do this:

  • Increase contributions to your IRA to the maximum allowed. Remember, this is something that you can still do for the 2005 tax year. 2005 IRA contributions can be made up until April 15, 2006. Is this starting to sound like deja vu? It should. Maxing out your retirement contributions reduces your income and reduces your cash on hand. Retirement savings are considered excluded assets when calculating EFC. Even better, funds held in a Roth IRA can be used for higher education expenses. Are you with me? Making the $4,000 annual maximum contribution to your Roth IRA reduces your savings account by $4,000 for calculation purposes, but if you choose to use the money to pay for education, there is no penalty for early withdrawl. Also, as was discussed above, increasing your 401k/403b contribution for next year will shelter more money that would otherwise be savings.

  • Reduce your consumer debt as much as possible. In addition to saving a considerable amount on high interest credit card debt, paying off your credit card balances will reduce the amount of cash you have on hand. Most outstanding consumer debt is not considered when determining financial aid. In addition to credit cards, this also applies to car loans -- so, paying off the SUV will reduce your savings, save you money in interest payments to the bank, and allow you the flexibility of an additional +/-$400 per month.

  • Pay down the mortgage on your primary residence. Equity in your family's primary residence is not considered at all in determining financial aid. Also, the mortgage on a second home can be used to offset assets -- debt which is secured by property is considered in the need analysis.

  • Don't transfer money to your soon-to-be college student. This goes against what your tax planner has been telling you for years, no? Yes, you can reduce your TAX obligation by gifting money to your children. However, getting aid to pay for college has nothing to do with your tax obligation. First of all, any money that you give to your children becomes their assets -- and that has a number of ramifications. They may choose to use the money for college, or not. It's their money. If they do choose to use the money for college, chances are they will eliminate all or most of their chances to receive aid. Students' assets are calculated differently in the Federal Methodology -- they are expected to contribute a much greater percentage of their earnings and their assets to their education.

  • Don't wait to make impending purchses. There are a number of items that are excluded from the Federal Methodology of determining EFC. Cars, computers, school supplies, clothing, and believe it or not, boats are excluded assets when determining EFC. I am not suggesting that you go out and blow all of your money, but acquiring excluded assets with cash will increase your chances of receiving financial aid. If you were planning on purchasing a new car anyway, then you should do that BEFORE you file the FAFSA. Keep in mind, though, that student assets are treated much differently than parent assets. So, buying your little angel a $35,000 BMW for their high school graduation gift seems like a good idea (does it, really?), student assets are counted differently and should be factored into that decision.

  • There are a few more topics to be discussed, including 529 Plans, Grandparents, the students' actual financial situation, and "special circumstances." I will try to get that post done and up in the next day or two, but I am done making promises.


    Anonymous said...

    Principle Residence
    If we own second home (recreation) about 45 minutes from primary, is there a way in Junior year our son can claim living on his own at the second home address (maybe paying us rent)so that he can obtain more benefits on financial aid? In essence they would NOT look at parents assets??

    The Travelin' Man said...

    Hey Anonymous - I don't want your comment (and my subsequent reply) to get buried on a one-year old thread, so I will make a complete post on the topic. Give me a day or so, though - I am exhausted.

    In the mean time, the short answer is generally no.