2014 is quickly coming to an end but financial moves you make in the next two weeks could make a difference in the financial aid your child may receive in the 2015/2016 academic year. Because college financial assistance is based primarily on the previous year’s income and assets, be certain of the financial impact before selling an investment, receiving gifts, spending on big ticket items or borrowing to make improvements to your home.
Financial Aid Forms
The amount of need-based financial aid a student may receive stems from information parents provide The Free Application for Federal Student Aid, or FAFSA and the CSS/Financial Aid Profile. The new FAFSA form will be available beginning January 1 at FAFSA.ed.gov and the CSS form is available now at collegeboard.org. The somewhat less familiar CSS form, typically used to seek financial assistance directly from the school, is often used for private universities to gather more information about your family. It uses much of the same information provided to FAFSA but goes further requesting data such as three years of income history. CSS also allows families to explain unusual financial circumstances when making a case for why they should receive financial assistance. Many universities require completion of the FAFSA or CSS form before a child will be considered for any loans, grants or scholarships. Make sure you are aware of the requirements of your child’s university so you aren’t missing out on available resources.
Influences on Financial Aid
Income and timing are two of the most influential factors on financial aid. Steps that can be taken to reduce income in the year prior to applying for aid should be considered. Ongoing 401(k) and IRA contributions are two of the more obvious choices to reduce income. Less obvious ones include size of household, number of children in college and federal, state and Social Security taxes paid. These too can have the effect of reducing the amount of income that is considered. If possible, postpone selling investments with capital gains. If this isn’t prudent, look to offset gains by selling other investments with losses. Home sales can also have a negative impact on the amount of aid received. Proceeds from the sale of a home are not income but they are considered an asset if a new home is not purchased in the same year. If applying directly to the school through the CSS, be sure to keep records of current education expenses and tuition bills for other children since some schools consider the impact they have on income when assessing need.
Assessment of Assets
Children’s income and assets are assessed more highly when calculating the expected family contribution. This includes UTMA account balances. Children’s assets are included at a rate of 20% of the asset level, while parent’s assets are assessed at only 5.64%. As an example, students are expected to contribute half of all income earned above $6,310 (in 2014) for the 2015/2016 school year. Children are also expected to contribute 20% of their assets. By comparison, parents are expected to contribute a maximum of 5.64% after exclusions for their primary residence and other assets such as 401(k), IRA accounts and certain family owned small businesses. If relatives plan to give large cash gifts, ask they consider postponing them to avoid increasing the child’s assets.
Spending to lower or shift the make-up of assets can also influence financial assistance. Savings used to buy a car or make home improvements are two examples of shrinking certain assets considered by FAFSA. If possible, when making home improvements, avoid a traditional home mortgage paid as a lump sum and use a home equity line of credit. The latter can be used as needed, avoiding large cash deposits that are considered assets. One of the most common mistakes made when completing the FAFSA form is including balances of employer plans, IRAs, and other tax-deferred accounts as part of the available assets. The FAFSA requires only assets owned outright, like a brokerage account or other property, etc. It does require you list any contributions made to tax-deferred accounts for that year, but not the balances themselves.
Suffice it to say there are numerous factors that can influence the amount of financial assistance a child receives for college. Before making any year-end financial decisions consult a financial advisor and thoroughly explore the impact they may have on the financial assistance your child may seek next year.