You won’t believe it, but there are ways to make it easier for you to get help from a need-based student. These tactics are legal because they take advantage of flaws in the need analysis method. We came up with these plans by looking at what was wrong with the Federal Need Analysis Methodology. It’s likely that Congress will close many of these gaps in the future. We think that pointing out these flaws makes things more fair and leads to a better need analysis process until this happens.
The “base year” in these strategies is the tax year before the “award year.” The “award year” is the school year for which help is being asked. The base year’s financial data is used in the need analysis process to estimate how much the family is likely to contribute. A lot of these tactics are just ways to make as little money as possible in the base year. In the same way, the value of assets is set when the application is made, and it may not be the same value during the reward year. Below, I will be listing a few factors that could affect getting financial aid.
Income
Families naturally report gross income (before health insurance payments are taken out) instead of adjusted gross income, which means they are overstating their income. When you report how much tax you paid, be careful. A lot of people get the amount of withholding (the number on their W2s) mixed up with the amount of taxes they pay. Capital gains are handled like income, so don’t make them during the base year. During your second year of high school, sell the stocks and bonds.
Do not take money out of your savings account to pay for school costs because those costs are not subject to the need analysis process. People who take out too much money from their pensions or take them out before they apply for financial help will have turned them into an included asset. Under some conditions, a small drop in the parents’ income could mean that the child is eligible for a lot more Federal help. It’s possible that the parent’s adjusted gross income is less than $50,000 and that everyone in the family can file an IRS Form 1040A or Form 1040EZ income tax return or doesn’t have to.
Assets
In general, money should be saved in the parent’s name instead of the child’s name unless the family is sure that the child will not be eligible for need-based help. You can put assets in the child’s name, but there are also two big risks. The gain is that the child is in a lower tax bracket, which means less tax to pay. But the risks are often greater than the rewards. If these assets are transferred, the child will be less likely to be eligible for financial help, but they don’t have to use the money for school.
Putting assets in the child’s name can save the family money on taxes after the child turns 18. This is because the income from the assets will be taxed at the child’s tax rate. However, the formulas used for need assessments assume that the child provides a much larger part of his or her assets (and income) than the parents do. As a result, tax-sheltering strategies often make it much harder to get financial aid. Before putting money in their child’s college account, parents should carefully think about how it will affect their financial help. People who have assets that belong to their child should move them back to their own names before the base year.
Sheltering Assets
No matter how much money you might save on taxes, don’t give your kids any assets if they have any chance of getting financial help. Also, don’t give your kids an income to work for the family business. If you know for sure that your kids will not be able to get financial help, take advantage of all the tax breaks you can.
The need analysis method doesn’t look at what other children have going for them. Parental assets can be kept out of the need analysis by putting them in the name of a younger (or older) relative. However, many schools now ask to see what assets the student’s siblings own, so this approach might change how institutional funds are given out.
Some things that you own, like cars, computers, boats, furniture, tools, books, clothes, and school supplies, are not assets. If you need to make big purchases, like a new car, do them by the end of the base year to lower your outstanding debt.
Trust funds aren’t very good at protecting assets because they are seen as student assets. Also, if the fund is set up so that the trustees can’t spend the principal, it could hurt the student’s chances of getting financial help.
Retirement plans, pensions, tax-deferred annuities, and life insurance policies are not usually thought of as assets by either the Federal Methodology or the Institutional Methodology. You can protect a big chunk of your assets by putting as much as you can into these funds in the years before the base year.
Number of Family Members in College
The parent payment is often split between all of the children in college. A family that doesn’t get financial help when only one child is in school might start getting it when two or more kids are in school at the same time.
For example, let’s say that the need analysis method figures out that a parent will pay $17,000, and a student will pay $2,000 annually when one of the students is in school. This student will need $2,000 to pay for college each year, which means they probably won’t be able to get much financial help. When a sibling of the student starts school next year, however, the parent payment is split in half. Even though the amount parents are contributing has gone up a little to $18,000, each kid should still get $9,000 from their parents. College costs $21,000, and each student contributes $2,000. This means that each student has a $10,000 financial need ($21,000 – $11,000 EFC), and they will both be able to get some financial help.
As a parent, if you are going back to school legally to finish your degree or get another one, show proof of this to the school’s financial aid administrator, and you must also ask for a professional judgment review. The school can take the parent’s real school costs out of their pay or find some other way to make up for it. There has been fraud in this area in the past, so you will have to show the person in charge of financial help that you are real.
Financing College Costs
- Find out if the school offers a tuition instalment plan so you can pay for your tuition over a whole year. It might be worthwhile to enrol because several colleges offer interest-free tuition instalment plans, and the upfront costs are typically minimal.
- Put money aside for education. Despite the fact that the need analysis formula depletes any assets, you will do better if you save a larger amount for education. Your chances of paying for college will increase as your income does. When your children are old enough to attend college, a regular savings account that is moderate in quantity can accumulate into a sizeable college fund if you begin early enough.
- Submit an application for scholarships in the private sector. A great place to get free college scholarships is Fastweb.
- Go after merit-based college scholarships.
