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Will your children attend their dream school?
Don’t let your “high school” money mistakes stand in their way.
Instead of living with guilt, let’s fix this problem before the therapy sessions begin.
First, there is a dangerous, but common, assumption that filling out the Free Application for Federal Student Aid form, more commonly known as FAFSA, is a waste of time. Many parents believe they earn too much money to make this painful exercise worth their while. Wrong!
Everyone, no matter their income, is eligible to receive unsubsidized Stafford Loans. These are government loans with lower rates than many private options. They also are more flexible regarding repayment terms. Subsidized student loans offer even better terms but there are income requirements.
If parents don’t fill out the FAFSA form, their children are ineligible for school-determined merit-based aid. Most don’t know this. Merit aid is formulated without taking into consideration family income and assets. Academics, athletics, artistic, and other criteria form the basis for these decisions. Need is not a condition for merit-based aid.
Without the FAFSA form, there is no merit aid. The bottom line: Unless you are Bill Gates, FILL OUT THE FORM.
Now that you know to fill out the form, you need to know the rules. FAFSA uses sophomore year as the base year in determining federal financial aid. Without careful planning this could turn into a sophomore-jinx nightmare.
The prior-prior year income is used to construct their eligibility for grants, loans, and other measures of college aid.
This was recently changed from the junior — or prior — year of high school.
The base year is a huge factor in determining current and future financial aid. It is imperative to make sophomore year as aid-friendly as legally possible. The right actions will increase the probability of receiving tuition assistance for your children. So, for a current sophomore graduating in 2020, 2018 becomes the pivotal year.
Veronica Dagher of the The Wall Street Journal wrote: “To Maximize College Financial Aid, Timing is Key,” providing parents with ways to maximize the chances of acquiring financial aid during sophomore year:
- Manage Income: 2017 income will not be looked at on the FAFSA for a current sophomore. Some ways to reallocate 2018 income (so that it shows in 2017) include: receive year-end bonuses by December 31, 2017; withdraw IRA funds this year instead of next; convert to a Roth IRA in 2017 instead of 2018; and delay an unpaid leave of absence to next year if possible. All of these actions will help lower 2018 income and increase your chances of receiving aid.
- Strategically Sell Investments: If you are looking to sell appreciated stock, do it now rather than in 2018. Capital gains are detrimental in the aid process using FAFSA’s formula. If you have to sell appreciated stocks in 2018, try to offset profits with corresponding losses.
- Spend Money Now: If you plan on fixing a roof, do it in 2017 rather than waiting until next year. These expenditures will lower your cash position and increase your eligibility for aid. Debt provides no benefits in terms of aid eligibility. Do not take this to an extreme and liquidate your bank account to fund a trip to Hawaii. Only use this strategy for items you were planning on purchasing. Remember this: “The FAFSA allows parents to shelter roughly $20,000 to $35,000 in assets from being considered part of their expected family contribution.” When implementing this strategy, keep these numbers under consideration.
- Plan Your Savings: Make sure assets are not in your child’s name. Parents’ assets are assessed at a 5.64% rate, while students come in at 20%. If your children have bank accounts, move the funds into a low-risk option in a 529 college savings fund. Many grandparents open up 529 accounts for their grandkids. Though well-meaning, they can seriously harm financial aid prospects. Grandparent-owned 529 accounts are not included in the FAFSA. They are looked at as student income when distributed. This could reduce aid by as much as 50%. Use these funds in your child’s junior or senior year of college, when they won’t count against you for future aid. If your child is thinking about attending graduate school, you might have to rethink this strategy.
College planning can be complex and confusing; these simple suggestions are valuable, but cannot offset years of not saving. We would be happy to help if you have additional questions about college planning strategies and how they relate to your other investments.
We also have a thorough presentation on this subject. We created this specifically for the needs of parents struggling to figure out this confusing financial maze. If your school or organization is interested, let us know.
Don’t assume anything. Hope is never a strategy.
