3 Ways To Help Your Student Qualify For More Financial Aid

May 18, 2016

For parents with their eldest child just finishing their freshman year of high school, the end of the school year may not trigger thoughts of paying for college yet. After all, you’re more likely dealing with helping your child find a summer job or even more daunting – teaching them how to drive. However, for parents who may have large non-retirement savings that could have the effect of reducing their child’s financial aid package, the time to act is now.

The Free Application for Federal Student Aid, or the FAFSA, is completed using income tax information from two years BEFORE your student graduates (called the “base year”), which starts with the second half of your student’s sophomore year. In other words, parents of the Class of 2019 or later: there’s still time to protect some of your savings from being considered in the federal aid package. Here’s how:

1. Max out your retirement savings. Any money you contribute to your 401(k), 403(b), IRA, etc. during the base year is added back to your income for financial aid purposes, but if you can afford it, try to front load your retirement savings in the years leading up to it in case you have to dial it back in order to pay for college. Max out your 401(k) and even consider funding a non-deductible or “back door” Roth IRA. In other words, get used to living on less while turbo-charging retirement.

2. Transfer savings in your kid’s name into a 529 account. Savings held in your child’s name are counted at a higher rate on the FAFSA than funds held in a 529 plan, even if the 529 is in the name of your student. If your child is definitely headed to college and has money in a custodial account or their own name, consider transferring any amounts that would be used to pay for schooling anyway into a 529.

There are a couple caveats to this though. Keep in mind that earnings on money in a 529 that is withdrawn for anything besides qualified education expenses is taxable plus a 10% penalty, so it’s not a place to shield savings for the future. Only shift money that you will actually pay toward tuition. Second, 529 plans have fees associated with them, so make sure you evaluate that as part of this decision. We really like savingforcollege.com as a resource in comparing plans and options.

3. Use savings to pay down your mortgage. If you have non-retirement savings that don’t have a specific purpose other than long-term savings, you might want to use some of that to pay down your mortgage to reduce the Expected Family Contribution. Some schools will ask for the amount of equity in your home when evaluating institutional aid, but for federal purposes, it doesn’t count.

Granted, these moves probably won’t be the difference between qualifying for need-based aid or none at all. But if you don’t wish to use a large portion of your savings for college bills or if you’re prioritizing retirement savings over education funding (a good priority), these moves can help increase the amount of federal loans that your child is offered, even if you opt not to take them. After all, every penny counts.