Personal Finance > College
    SAVE   |   EMAIL   |   PRINT   |   RSS  
Maximize your financial aid chances
Attention mom and dad, here are steps you can take now that could literally pay off at college time.
October 18, 2005: 4:55 PM EDT
By Jessica Seid, CNN/Money staff writer

NEW YORK (CNN/Money) - If you are planning college visits with your kids this fall, you are probably anticipating the thrill of strolling across campus together but fearing the financial ramifications of your kid's higher education.

But don't fear, student aid reached more than $122 billion in '03-'04 (the latest year for which there is data available) according to the College Board, and that's an 11 percent increase over the preceding year.

So how can your family get a piece of the action?

The engine driving the financial-aid decision -- the Free Application for Federal Student Aid (FAFSA) -- isn't due until June 30, 2006. But some schools ask for them as soon as February and it's never too early to start getting your finances in order to improve your chances.

The FAFSA form is required by all private and public schools. You can get the FAFSA from your guidance counselor, the financial aid office at a local college, your local public library, or by calling 1-800-4-FED-AID. The online version of the form is available at

Once a college has your FAFSA, it calculates eligibility by taking the cost of attending a particular college minus the expected family contribution (EFC). Your EFC is determined by your financial circumstances and how they compare to others applying for aid.

Your income is the biggest factor in determining this calculation, but the EFC also factors in your assets, such as the number of children you have attending college at the same time and the number of years you have until retirement.

You can use the College Board's college financing calculator to get a rough estimate of what you will be expected to pay. "But it is so subjective," warned Kalman Chany, president of Campus Consultants and co-author of "Paying for College Without Going Broke."

Aid awards can vary widely for the same student since different schools assess financial needs differently. Some schools base financial aid on need and nothing else -- others may consider additional financial considerations, such as medical bills or business losses.

Plus, "the better students tend to get better packages," Chany said. "If they feel you can contribute more to the university as a student academically, musically or whatever, then you don't have to contribute as much financially. "

Aid packages include not only grant and scholarship money, which never have to be repaid, but also loans and work-study programs.

But it's not out of your hands. There are a few money-smart strategies for improving your financial-aid prospects.

Save in your name...not the child's

As long as parents own them, Coverdell IRAs and 529 saving plans don't count as the student's asset, but as the asset of the parents for financial-aid purposes. That's a big plus, because parental assets don't count so heavily against a family's eligibility.

College-aid officials assess 35 percent of a student's assets versus only 5.64 percent of a parent's holdings.

You can open a Coverdell at most banks, brokerages and mutual fund firms and the money you contribute grows tax deferred, which means that gains are not taxed until the entire amount is withdrawn.

Dave Ramsey, author of "Total Money Makeover: A Proven Plan for Financial Fitness," suggests funding college with a Coverdell funded in a growth stock mutual fund.

You can only contribute up to $2,000 a year to a Coverdell but you are free to buy any stock or mutual fund you want.

529 savings plans, like Coverdells, won't reduce federal-aid eligibility, but investment options are limited to the few funds available in a plan.

The added bonus is that you can contribute as much as you want up to $55,000 tax-free in one year by taking advantage of five years' worth of annual gift exclusions all at one time and save tax-free for education costs.

Maximize retirement savings

Money saved in retirement accounts, such as IRAs and 401(k)s, isn't counted by the college financial aid officer. As a result, it pays for parents to maximize their contributions for retirement before focusing on college accounts.

In addition, you can withdraw money from an individual retirement plan for qualified higher education expenses without penalty. But be cautious in your planning -- if you don't end up with enough saved for your retirement you could run in to problems down the road.

Watch your debt load

Chany suggests paying down debt before filling out the FAFSA.

"If you paid down credit-card debt that would reduce the net value of your savings." Chany said, which would improve your profile in the eyes of the financial-aid officers.

Parents with $20,000 in the bank, but $10,000 in credit-card debt are going to appear to have more resources than parents with $10,000 in the bank and no debt.

"In the end they have the same amount of money but not to the financial-aid people," Chany said.


For tips on saving for college, click here.

For more on the traditional 529, click here.

Or for more on the relatively new Independent 529, click here.  Top of page

Follow the news that matters to you. Create your own alert to be notified on topics you're interested in.

Or, visit Popular Alerts for suggestions.
Manage alerts | What is this?