Improve Your FAFSA Aid Chances

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It’s that time of year when you and your child may be looking forward to college next fall.  You may also need to seek financial aid to help pay for it.  This process usually includes completing the Free Application for Federal Student Aid (FAFSA).

It’s no secret that certain factors may prevent a student from being able to receive as much aid as possible.  However, understanding how to improve your chances for getting aid can be as tricky as putting together a puzzle of the Sistine Chapel.

I feel your pain, and have felt this pain with my clients.  As a result, I summarized below are the top three ways a student and family may maximize their chances of receiving financial aid before filing the FAFSA.

Please consider talking with an advisor one-on-one about your personal situation before implementing any of these ideas.

Reduce Available Cash

Having surplus cash in your bank account – while advisable from a financial planning point of view – may impact your child’s ability to get financial aid.

Consider the following three strategies for reducing your available cash while potentially benefiting yourself and your child financially:

1. Pay off your debts (including credit cards and loans)
2. Maximize your contribution to your child’s 529 college savings plan
3. Maximize your contribution to your employer-sponsored and individual retirement plans

Reduce Assets in Your Child’s Name

The Department of Education assumes that money in the child’s name will be used to cover the child’s educational expenses.  As a result, assets under your child’s Social Security number (such as a standard custodial account) may impact your child’s ability to get financial aid.

The 529 and Coverdell accounts are currently exceptions.  Congress passed a law to encourage saving via these vehicles.  As a result, these are considered parental assets even if they are open in the name of the child.

Consider converting standard custodial accounts to Coverdell or 529 plans.  To be precise, securities held in the standard custodial account would need to be liquidated prior to contributing to a Coverdell or 529 since contributions to both accounts can only be in cash.

Please speak with a tax advisor on the ramifications of selling any securities.  Also, speak with a financial advisor to determine if you’re eligible to contribute to a Coverdell.  Eligibility is based on your adjusted gross income.

Reduce Your Adjusted Gross Income (AGI)

The lower your AGI, the higher your chances are of receiving financial aid for your child.  Similar to the first point, you may:

1. Maximize your contribution to your child’s 529 plan.  If your plan is a state plan, you may be eligible for a tax write-off for a portion of your contribution.
2. Maximize your contribution to your employer-sponsor and individual retirement plans.  Contributions may be eligible for write-offs on your taxes.
3. Speak with your tax advisor to determine if you’re eligible for additional tax credits.

With patience and the right advice, your child may have the additional financial support to attend the college of his or her dreams.