Applying for College Financial Aid: Maximizing Your Aid Package

Timing The Receipt Of Taxable And Tax-exempt Income

Many a financial aid application has been turned down because the applicant sold something in a base year that produced a large capital gain (the amount of money you receive on a sale in excess of what that particular piece of property cost you), received a large year-end bonus, exercised some stock options, took an unplanned distribution from a pension plan, or rolled over a traditional IRA to a Roth IRA.

If you know when your child is due to begin college, do your best to schedule large infusions of income and cash two years or more before she is due to start; the financial aid folks won't care about what's on your income tax return in any years other than your base years. So, if you need to sell an investment, do it sooner rather than later. If you're going to receive a year-end bonus, try to defer it to a non-base year, if possible.

If you can't avoid large amounts of extra income in one of your base years, try to take that income earlier in the year, rather than later, to give yourself the best part of a year to find ways to offset at least some of it. For example, you may want to give more to charity, take capital losses, or make extra mortgage payments, all of which should reduce the amount of income you show on your return as well as the amount of cash you have in your account on the day you complete your FAFSA application. And, if you need to access money from a pension plan, try to borrow the money rather than take a distribution; although the borrowed funds may show up as cash in your account, they won't show up on any tax return, but the full amount of any distribution will.

If you absolutely must raise cash in one of your base years, try to raise it in a way that increases your cash flow, but not your taxable or tax-exempt income. For example, if you must sell stocks, try to offset any capital gains with capital losses. This gives you the opportunity to realize some of the appreciation in your great stock picks while also getting rid of some dogs.

Paying Down Debt

You know, of course, that debt is bad, but in the case of financial aid, it's horrible! Not only do you have those debt payments to make each and every month, but you don't even get any credit for them on your financial aid application. All the application is concerned with is how much you have in income and assets, not how much you owe.

To minimize the value of assets you show on your aid application, get rid of your debt. Sell some assets, if necessary, to pay off your car loan, make extra mortgage payments, and bring your credit card balances to zero. Complete all these transactions before you fill in your aid applications; the FAFSA folks are concerned only with the value of your assets on the day that you complete the application — not the day before and not the day after. Your good intentions will be worth less than nothing if you raise the cash but fail to pay off your debt before filing your application.

Making Sure Assets Are Not In Your Child's Name

The financial aid people realize that you may have something other than college to spend at least some of your money on, but they assume that anything your child owns is fair game when they try to assess how much your family can afford to contribute toward the cost of a college education. Accordingly, they include at most 5.6 percent of parents' includable assets in their calculation of expected family contribution (EFC), the amount that the U.S. Department of Education figures you should be able to cough up for one child's educational costs in any given year. They expect your child to kick in a whopping 20 percent of her assets as a part of the same EFC for one year.

If you want to minimize the amount of your EFC, keep assets in your name alone, joint with your spouse, or in the name of another relative outside the household. If your child has accumulated assets since birth — for example, in a Coverdell Education Savings Account or Uniform Gifts to Minors Act/Uniform Transfers to Minors (UGMA/UTMA) account  — spend down these assets first. You may not qualify at all for financial aid in the first year or so of college while you're depleting these accounts, but you'll be better off down the road, once only you have assets to be counted, and not your child. Of course, spending down your assets may not work for some families; if your income is too high, it won't make any difference what the value of your assets are. The EFC calculation will still place your family outside of the need-based range, depending on what college your child will be attending.

Beware of using your dependent child's money to buy items that you are expected, as his parent, to provide for him. Your money must be used to supply food, clothing, and shelter, but your child's funds may legitimately purchase computers, trips, a car, life insurance, or anything else extra that you feel may benefit him but isn't essential to his health and well-being.

Anticipating Your Expenses

No one is suggesting that you run out and buy that new Mercedes or sink your money into a new boat, but most people have large expenses that they tend to defer, such as replacing a car or a roof. The natural tendency, when facing these expenses at the same time as the first college tuition bill, is to postpone these expenditures as long as possible, hopefully until your student completes college.

A certain amount of self-deprivation is normal for parents, but indulging yourself a little may actually help your student's overall financial aid picture. Replace that old rust bucket that's been held together with duct tape for the last three years (but remember, pay cash — don't finance it unless you absolutely must), and repair the roof. Paying for these items will deplete your cash and asset balances, which you must, of course, report accurately on the FAFSA. Because the value of the new car and the house repairs isn't included on your aid application, you can successfully convert reportable assets into nonreportable assets and also take care of some necessary expenses in the process.

Spreading Your Available Assets Across Multiple Students

You may have more than one child who dreams of attending college. If your children are relatively close in age, your dreams may more closely resemble nightmares, thinking of how you're going to pay for their education.

You may be surprised to find out that, while each of your children will have to file his or her own FAFSA application, your EFC will not be the same for each student. The portion of the EFC that is calculated based on your income will be divided by the number of students you currently have in college. The student's portion (based on his income and assets) will be then be added on each application, arriving at the EFC for each student. The more members of your family who are attending a postsecondary school at any given time, the greater the potential financial aid award for each student. Although the total that you'll be expected to pay will likely be greater for multiple students than it would be if you just had one in school, the per-student cost should be less (unless your income and/or asset value is very large).

Your family consists of your children and you and your spouse. If either you or your spouse has any plans to return to school, the best time to do it may be when your children are also in school. That all-important EFC also applies to educational expenses that you and your spouse incur.

Postponing Gifts

You may be fortunate enough to have other family members or friends who want to contribute money toward your child's education. If those additional funds still aren't enough to pay the full amount, even with your own contribution, you may want to encourage them to postpone making gifts in any base year and instead wait until after your child finishes school.

Any money that is gifted directly to your child into a Coverdell ESA or a UGMA/UTMA account or paid directly to your child's college as tuition is included in the EFC at a rate of 20 percent. Your child's benefactor may be working from the most noble of intentions, but the effect of that gift during those all-important base years may be harmful to your attempts at receiving outright grants and low-cost loans.