Starting October 1, this year’s Free Application for Federal Student Aid (FAFSA) is now available for current and prospective college students. The FAFSA determines a student’s eligibility for Federal grants and loans and is used by schools to craft a student’s financial aid package. Everyone, regardless of income levels, should fill out the FAFSA because it is necessary even for merit-based scholarships.
Maximizing Your Potential Financial Aid
File the FAFSA as soon as possible after October 1, as some financial aid is awarded on a first-come, first-served basis until the money runs out. In fact, based upon the most recent statistics, students who file the FAFSA during the first three months (October, November and December) generally receive twice the grants, on average, of students who file the FAFSA later.
In addition to filling out the FAFSA early, there are several other time-sensitive strategies for parents to pursue to reduce income or assets that can increase a student’s chances of receiving need-based financial aid for college. These strategies are based on the income and assets of both you and your student:
- Understand your base year: The FAFSA bases the expected family contribution (EFC) on income and tax data during the prior-prior year, also known as the base year. The base year for the student’s first FAFSA runs from January 1 of the sophomore year in high school through December 31 of the junior year in high school. On the other hand, asset data is reported as of the date the FAFSA is filed.
- Any attempt to reduce income must be done well before the FAFSA is filed: Income is weighted more heavily in the FAFSA formula than assets, so it is crucial not to do anything to artificially inflate income in the years under scrutiny. Every $10,000 decrease in parent total income increases eligibility for need-based financial aid by about $3,000. Every $10,000 decrease in student total income increases eligibility for need-based financial aid by about $3,750.[1] Some financial moves may need to be executed prior to the base year. For example, if you wish to sell stocks or other investments to pay for college, you may wish to do so before the base year, so that the capital gains do not artificially increase income during the base year. If selling stocks in the base year is unavoidable, then attempt to offset any capital gains through tax-loss harvesting. Likewise, you should avoid exercising stock options or taking retirement plan distributions during the base year. Bonuses should be deferred until they no longer affect the EFC if possible.
- Pay down debt first: Assets can be reduced for FAFSA purposes by paying down debt. Money in a bank account is a reportable asset and counts against the EFC on the FAFSA, while many forms of consumer debt are ignored. Paying down credit cards and auto loans therefore reduces the amount of reportable assets on the FAFSA. If you decide to pay down debt, do so before filing the FAFSA, so that your bank and brokerage account statements reflect lower account balances on the date you file the FAFSA.
- Accelerate necessary expenses: If you were going to install new appliances in your home or replace the hot water heater, you might as well do it before you file the FAFSA instead of afterward. Like paying down debt, this reduces reportable assets on the FAFSA. Perhaps you were going to purchase a car for your student to take to school and now would be a great time for that as well. Buying a vacation home is not recommended, though!
- Increase contributions to qualified retirement plans: Increasing retirement plan contributions in the years prior to filing can reduce your expected family contribution under the formula. You should contribute up to your retirement plan’s contribution limit if possible. At the very least, maximize the employer match on contributions to your retirement plan, which you should be doing regardless. Contributions in a given year get added back as untaxed income on the FAFSA; however, the money already in a retirement plan is not reported as an asset on the FAFSA.
- Pay attention to any bank or brokerage accounts in the name of the student: Assets in a child’s name are weighted more heavily on the FAFSA than those in a parent’s name. Discuss moving the assets registered in the student’s name into your name, or spend down the student’s money first, to increase eligibility for need-based financial aid. For example, move money from a UGMA or UTMA account, which is reported as a student asset on the FAFSA, to a custodial 529 plan.
- Gifts: Gifts from a grandparents or other family member to the student will count as un-taxed income to the student. However, gifts to the parents are ignored as income on the FAFSA. Grandparents should contribute money directly to a student- or parent-owned 529 plan, gift to parents to use toward the student’s tuition, or pay tuition directly to the school on behalf of the grandchild.
Following are several other factors to consider that could impact how much federal aid you receive in current or future years:
- Special circumstances: If a student’s ability to pay for college is affected by special circumstances, they should appeal for more financial aid. College financial aid administrators can adjust the data elements on the FAFSA on a case-by-case basis but will require adequate documentation of the special circumstances. These circumstances could include: unemployment, death or disability of a wage-earner, high unreimbursed medical or dental expenses, homelessness, disability-related expenses, private K-12 tuition, unusually high child care or dependent care costs (including nursing home costs for an elderly parent) and the end of child support or Social Security benefit payments. One-time events such as an unusual bonus or relocating for a job and having to sell your home at a gain can also be considered special circumstances. You can file an appeal arguing that the circumstances do not reflect your usual income and ability to pay.
- Divorce: If a dependent student’s parents are divorced or separated (including an informal separation) and the parents do not live together, only the custodial parent’s information is required on the FAFSA. If the custodial parent remarries, then the stepparent’s data must be reported. Consider delaying the new marriage if the custodial parent is the lower-earning parent, as it can yield an increase in need-based financial aid.
- More children enrolled: Your portion of the expected family contribution (EFC) is divided by the number of children enrolled in college on at least a half-time basis. Increasing the number of children concurrently enrolled in college from 1 to 2 can have the same impact on financial aid eligibility as dividing parental income in half.
- A student’s dependency status: If the student is dependent, parent information is required. If the student is independent, parent information is not required, but information from the student’s spouse (if any) will be required. The student’s eligibility for need-based financial aid can sometimes be increased by changing their dependency status from dependent to independent. A student can claim independent status by delaying college until age 24, getting married, having a child or other dependents, serving on active duty with the U.S. Armed Forces, or being a veteran of the U.S. Armed Forces.
Conclusion
All families should plan to complete the FAFSA for students approaching college-age or for those who are already enrolled. There are smart strategies you can apply well in advance to maximize your student’s chances of receiving more financial aid. Working with your financial advisor is the best way to structure a successful planning strategy that fits your unique personal finance situation.
To learn more or to start your FAFSA form, visit: studentaid.ed.gov/sa/fafsa.
[1] https://www.savingforcollege.com/article/how-to-get-more-financial-aid-for-college
