Applying for College Financial Aid: Maximizing Your Aid Package

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After you begin to suspect that your savings and amounts available from current earnings will fall short of your child's anticipated educational costs, some forward planning may well increase the amount of outright grants and very low-cost loans your student may qualify for.

Hoping to hit the lottery or hiding your head in the sand are both very common responses to savings shortfalls. They won't help you, though, when you're trying to sort out how to make that dream education happen for your son or daughter. Be alert, be proactive, and plan ahead. All is not lost if you fail to save enough, but failing to recognize early in the process that you won't have enough may cost you more in the long run. By not planning for this eventuality earlier, you may be forced to take more loans with higher interest rates, than you would have done otherwise.

If you apply for financial aid, you join a group of other parents whose savings are also falling short. Funds are limited, and they're supposed to be distributed as equitably as possible. The following strategies aren't intended to somehow skew the system in your favor, but rather to make sure that your child receives a fair and reasonable award. Be honest in your assessment of what you can afford; don't make yourself out to be more destitute than you really are.

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.