January 18, 2014

Maximize college aid by planning early

As of Jan. 1, submission of the Free Application for Federal Student Aid (FAFSA) began for the 2014 college year. Regardless of your income or assets, parents of soon-to-be college students should complete this process.

As of Jan. 1, submission of the Free Application for Federal Student Aid (FAFSA) began for the 2014 college year. Regardless of your income or assets, parents of soon-to-be college students should complete this process.

This application is for need-based aid and the determination of the EFC (expected family contribution). Schools use this information for distributing federal financial aid based on need, but it is also can be used to help determine the amounts awarded for merit and talent financial aid as well.

Because the application is available for completion beginning the first of January of the senior year, many parents give little discussion or thought to the topic until the student is a senior in high school.

This can be a huge mistake. Parents who start planning as early as the sophomore year, can maximize savings.

When considering need-based financial aid, the government considers seven criteria: incomes and assets of the student and parents, the age of the older parent, the number of household members and how many of them will be attending college in the coming year. The amount of debt the family already carries has no bearing on the financial aid or expected contribution.

A quick reminder: This applies to dependent students. Many parents feel that if the student is independent, they will qualify for more financial aid but it is difficult to qualify a high school student as independent so do not make this the plan. Also, it is important to realize that the expected contribution is the amount the government decides, through the process, that the family must pay as its contribution to a college education.

From a need-based perspective, a family would like to see the lowest contribution possible, thus qualifying the student for more aid, more efficiently structured. To better understand: The cost of attendance minus the EFC determines the need; thus a lower EFC can qualify for more aid to meet that need.

Here’s why it is important to begin planning early:

•  The FAFSA uses financial information on the day the application is completed; it is a snapshot.
•  The information requested is from the tax year of the previous year. This is the January of the junior year through December of the senior year. This creates a possible planning dilemma if the family just waits until the application is due as there is no way to change the financial outlook from the previous year. You can only do this for an upcoming year. This is why the planning should begin in the sophomore and/or junior year.
•  Beginning to plan in these years allows the family to reposition assets to improve their aid position. Parental assets are assessed, for EFC calculations, at 5.64 percent, and student assets are assessed at 20 percent. In addition, some parental assets can be sheltered. This is not true for the student nor do they have any asset protection for retirement. Proper planning in this regard can make for a more attractive outcome in the calculations.

For self-employed individuals and business owners, there are even more opportunities to improve their outcome. There are steps that can be taken with income for both the parents and the students that allow for more possibilities of aid. These are all actions that can save a family thousands of dollars a year in out-of-pocket expenses for college. The average degree is now taking an average of five and a half years to earn, according to Department of Education statistics. Even a thousand dollars a year can preserve a significant amount of money.

Your planning will also take into account when and how income is received and bills are paid.

Acceleration of bills can lower assets, while decelerating income can impact that year’s tax return. It is important to remember that college planning and funding can seem counter-productive sometimes from a tax planning basis, but paying a little more in taxes to reduce much more in tuition payments can provide significant gains. The process can also make little sense to a financial planner not specializing in college planning. Many times the goals here are long-term, such as retirement. It can make more sense to have a different mindset for the college years to preserve money for the retirement years than taking the long-term approach and spend money unnecessarily.

With college costs and college debt rising year after year at an alarming rate, it makes sense to learn how the process of aid is determined and what can be done to increase it.

Don’t wait until the FAFSA is due to gather the necessary information and just enter it into the application. Educate yourself early and make a plan to qualify for all you can in aid. Also, educate yourself on how the college process works.

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