Parents of high school seniors still have a few last-minute opportunities to maximize their college-bound student’s chances at financial aid.
Families can file the Free Application for Federal Student Aid (FAFSA), which is the form that determines your family’s eligibility for financial aid, as early as October 1 this year, using income data from their 2015 tax return. (Previously, the start date was three months later, on Jan. 1, with families estimating income data for the tax return they would file that spring.)
If your aim is to file soon, experts say, there are still some (legal) strategies you can employ to essentially work the formula and make you appear less affluent on paper. Asset values are reported at the time you file the FAFSA, allowing more flexibility for last-minute moves.
A few caveats about FAFSA preplanning: Some colleges also ask applicants to file the College Scholarship Service Profile (CSS), which uses a different formula. There are also other considerations, including parental marital status, age and number of kids in college, that can shift the formula and affect the expected family contribution.
Some families won’t be able to benefit much, so it’s worth estimating your aid with the before making drastic changes.
“For the true high-net-worth client, regardless of how they try to manipulate their financial structure, it’s going to be fairly difficult to qualify for need-based aid,” Kevin Meehan, regional president of Wealth Enhancement Group, based in Itasca, Illinois, told CNBC.com earlier this year.
(Even if you think that’s the case, you should still file the FAFSA. Among other reasons, without it, you aren’t eligible for any federal student loans and some kinds of state- or college-based aid.)
While some FAFSA prep requires planning years in advance, these three moves can help families planning to file this fall.
Shelter your kid’s money.
The FAFSA weights assets in the child’s name more heavily than those in a parent’s name. That’s as much as 20 percent, versus a maximum of 5.64 percent for parental assets. The exception: 529 college savings accounts are assessed at the parent rate, even if they are in the child’s name.
If your child has money in a savings account or CD he or she has earmarked for college, discuss transferring those to a 529 plan to get that lower inclusion rate, Evelyn Zohlen, president of Inspired Financial in Huntington Beach, California, told CNBC.com earlier this year. (Or, if it’s earned income from a summer job, your child might make an IRA contribution so the money won’t be counted.)
And if those savings are earmarked for something else, like a car or computer? Try to make that purchase before filing the FAFSA, so the cash won’t have to be reported, she said.
Pay down debt.
It’s a smart magic trick. When you use money from a reportable asset to pay debt that isn’t factored into the FAFSA — like credit card balances, an auto loan or the mortgage on your primary residence — it essentially disappears, Mark Kantrowitz, vice president of strategy for college and scholarship search site Cappex.com told CNBC.com earlier this year.
Paying down your mortgage has extra benefits. The net worth of the home isn’t included in the FAFSA, and that equity gives you more options when it’s time to pay the college bills, said Meehan — you might open a home equity line of credit.
“That’s going to be a lot less expensive than going out to get a private loan,” he said, and the interest may be deductible.
If parental assets are better than child assets, assets in a grandparent or other relative’s name can be even better.
“Now when you go to apply for your FAFSA, you will legally not have to disclose that this account is in your name, because it’s not,” Zohlen said.
But it’s a tactic to approach with caution. Distributions from a grandparent’s 529 account may be treated as untaxed income of the student on future FAFSA filings, cutting aid by up to 50 percent.
“This is a terrible backfire,” Zohlen said.
Parents have two options to consider. You might reassign ownership of that 529 from a grandparent to yourself, which can be done easily (but does boost your reportable assets). Or wait until after you’ve filed your last FAFSA, ahead of your child’s senior year of college, to take distributions from a grandparent-owned asset, Meehan said.