Financial Aid: The Crib Sheet
Your child is applying to college? Already attending? It's not too late to beef up your family's financial aid.
(MONEY Magazine) – If your child is filling out college applications, or even if he or she is already enrolled, there's still time to boost his or her chance to qualify for grants and low-cost loans--but only if you make the right moves. Jan. 1 marks the start of the financial aid season for students who begin college next fall. That's the day the federal government begins accepting submissions of the Free Application for Federal Student Aid (FAFSA). "Many parents just fill out the forms and hope for the best," says Kal Chany, a financial aid consultant and author of the guide Paying for College Without Going Broke. "It's better to have a strategy." Below are the seven habits of highly effective applicants.
RULE NO. 1
Don't Ask, Don't Get
A family with a six-figure income may think they have too much money to qualify, but that isn't always the case. A grant worth several thousand dollars may be available, even for high-earning families that have other kids in school or for other circumstances. It pays to apply and see what happens. "I see families eligible for aid with incomes of $150,000 or even $200,000," says Chany. Also, some school-sponsored merit scholarships don't consider need, but you still have to fill out the form to qualify.
RULE NO. 2
Sell Yourself Short
Schools typically count as much as 5.6% of assets in the parents' names (outside of home and retirement assets) toward your annual expected family contribution (EFC), the amount that you are supposed to come up with each year to fund your kid's schooling. The application asks you to list those assets as of the day you file the form, so you have until the last minute to reduce your exposure. Pay off credit-card debt to reduce your cash. And consider prepaying part of your mortgage. Your home equity will rise, but most schools (especially public ones) don't count your primary residence as an asset.
RULE NO. 3
Hide Your Money in Retirement Accounts
Money in IRAs and such don't count as assets. Therefore, make your 2005 and 2006 contributions before you file. And avoid using retirement account balances to pay for school, since those withdrawals will be calculated as income next year (22% to 47% of income goes toward your contribution, depending on how much you make). You're better off spending cash that's outside your plan.
RULE NO. 4
Cars, PCs, furniture, appliances, clothing and other supplies you're going to buy for your college-bound kid don't count as assets. Buy them before you file for aid.
RULE NO. 5
Steal from Your Kid
Have you set up savings or investment accounts in your child's name to reduce taxes? Uh-oh. Aid officers count a larger percentage (35%) of his assets toward your contribution. Solution: Use the money you've been saving for your kids to buy the items mentioned in Rule No. 4.
RULE NO. 6
Make Sure Grandma Knows the Score
Your folks should not give money directly to your child, which boosts his or her assets. Some grandparents write a check directly to the school--but many schools will increase your EFC by an amount equal to the gift. Grandparents should write the check to you or--better--open a 529 college savings plan in their own names, with the child as beneficiary.
RULE NO. 7
Play "Let's Make a Deal"
Schools issue financial aid offers in the spring, and even then, it's not too late to try for a better package. Document special circumstances and ask for a "professional judgment review." Schools often consider factors such as a job loss, high medical costs, private school tuition for siblings and business setbacks. Financial aid officers will generally try to work within their schools' policies to improve your award, particularly if the college views your child as a catch and if you (tactfully!) let the aid officer know that another school is offering more help.
What Time Is It?
Parents and students can file for financial aid online at FAFSA.ed.gov. Procrastinators who file at the last minute should remember to get their forms in before midnight central standard time. For example, Californians should file their application before 10 p.m. local time on the deadline date.
Fun with the FAFSA
If you enjoy filling out your tax return, you'll adore the Free Application for Federal Student Aid, available online at fafsa.ed.gov. Like the 1040, financial aid forms are complex enough to support an entire industry: Companies such as Student Financial Aid Services (fafsa.com) or EasyFAFSA (easyfafsa.com) charge $50 or more to help students fill out, check and submit financial aid forms. To make matters more confusing, the form is addressed to the student, even though everyone knows that it's going to be a parent filling it out. Whether you hire one of these firms or go it alone with your kid, here are some of the trickier questions on the form, along with some tips to make sure that you get what's coming to you.
"What was your (and spouse's) adjusted gross income for 2005?" STRATEGY: Don't misattribute Social Security payments to the student. Disabled or retired parents may receive Social Security benefits for children. Those benefits should be allocated to the parents' income (since it will count less to the aid office) even if they are taxed at the child's rate.
"What was your parents' adjusted gross income for 2005?" STRATEGY: Don't be flashy. You may not have time to finish your tax return before you file the FAFSA. If you have to estimate adjusted gross income, be honest but conservative.
"Enter the total amount of your parents' income tax for 2005." STRATEGY: Don't write in your withholding in place of total income taxes paid. You may have paid more or less than what was taken out of your paycheck. This common mistake could significantly boost your after-tax income.
"As of today, what is the net worth of your parents' investments, including real estate (not your parents' home)?" STRATEGY: Don't include retirement accounts. A $200,000 IRA could boost your expected family contribution by more than $11,000 a year.