How Can You Maximize Financial Aid Eligibility?

As children apply to colleges this fall, many parents are wondering how they will afford to pay those upcoming bills for tuition, room and board, and books and other supplies. While a lot of what determines your child’s eligibility for aid is out of your control, there are some things you can do to maximize how much aid they can get. Let’s take a look at some of the factors affecting eligibility:

Student Income: The biggest factor is student income which reduces aid by about 50% (over a $6,250 allowance). Most students don’t have much income to report, but be careful of taking money out of 529 plans that are not in the name of you or your child because withdrawals from plans owned by grandparents or other friends or relatives are counted as income to the child. Instead, they may want to wait and use that money for the last year of school after the aid has already been awarded.

Parental Income: Your eligible income reduces aid by 22-47%, with higher reductions typically for household incomes above $50k. It’s based largely on AGI so contributions to pre-tax retirement accounts and HSAs can reduce the eligible income. Many people don’t realize that this income also includes asset sales and withdrawals from retirement accounts. Try to take capital gains before your child’s sophomore year of high school or after their junior year of college or look for investments you can sell at a loss. If you want to use an IRA for education expenses, use it for the last year like a non-parental 529 plan.

Student Assets: Assets in your child’s name can reduce financial aid by about 20%. This is a downside of UGMA/UTMA accounts. One exception is for money in a custodial 529 or a Coverdell Education Savings account so consider moving the child’s money into one of those accounts (plus the earnings are tax-free if used for qualified education expenses). Otherwise, try to spend it as early as possible so it will count against fewer years.

Parental Assets: This only reduces aid by about 5-6%. Retirement accounts don’t count against you and debt won’t reduce your countable assets so it’s one more reason to contribute to retirement accounts and pay off debt.

Your child’s financial aid eligibility isn’t necessarily set in stone. The financial aid impact of your decisions can matter as much or even more than the tax impact. If you’re unsure how to do this, you may want to consider consulting with a qualified and unbiased financial planner.

 

 

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