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How to Get More Financial Aid for College

By Evan Pierce

financial aid foldersAs kids graduate from high school and prepare to move on to the next phase of their lives, many parents face a similar conundrum: How in the world are we going to pay for college?

Whether you have one child or several, the costs of college are simply daunting. With college costs rising approximately 7% each year, you could be out half a million dollars by the time you pay for a few kids to get a degree. That’s enough to destroy even the best-laid financial plan.

The solution may be in the acquisition of student loans and financial aid. However, unless you start viewing your personal finances the way a student loan officer does, you could be in for a surprise. You may earn too much, have too much money in the wrong places, or have too much equity in your home to qualify for much – or any – aid. Examine these issues beforehand to maximize your eligibility for loans and financial aid before it’s too late.

How Colleges Determine How Much Aid a Student Qualifies For

It is important to first note that you should never lie on a college financial aid application. There is an increasing effort to crack down on cheaters, so just don’t do it.

That said, understanding the rules and knowing how colleges determine a student’s ability to pay can help you make smart choices as to how and where to invest your money. Here are some of the factors colleges take into consideration:

  1. Money in Your Child’s Name. Money that is in an account strictly in your child’s name is viewed as available to be applied to college tuition.
  2. Your Household Income. Simply put, if you make a lot of money, you won’t qualify for much aid.
  3. 529 Plans. A portion of the money saved in 529 college savings plans are counted against your ability to qualify for aid.
  4. Your Non-Retirement Assets. Money you have sitting in non-retirement accounts – such as checking, savings, or investment accounts – hurt your ability to qualify for financial aid.
  5. Other Assets. Generally speaking, private colleges look at the equity you have in your home as a resource to pay for college. Public schools, however, typically do not.

college fund jars

How to Better Increase Your Chances of Receiving Financial Aid

1. Try to Reduce Your Income

You can reduce your income by contributing the maximum amount possible to your 401k and IRA. Also, avoid taking capital gains, as these will increase your income, and avoid exercising stock options unless you are required to. You may also want to investigate deferring bonuses until after your children have graduated from college.

2. Use Your Child’s Money to Pay for Necessities

Certain types of property – including automobiles, computers, furniture, appliances, books, clothing, and school supplies – do not count as assets. However, the money your child has to pay for these things can be seriously detrimental to their ability to qualify for aid. For this reason, it’s best to make purchases with your child’s money for the things they need instead of using your own. Make major purchases with your child’s funds by January of the year he or she begins college (referred to on financial aid forms as the “base year”).

Though it’s not advisable to go on a spending spree, it is wise to simply accelerate a few necessary expenses. For example, if your child needs a computer, automobile, dorm refrigerator, and microwave oven for school, buy these items prior to the start date of the base year. Since student assets count more heavily than parental assets, this strategy should apply mainly to items needed by your child and purchased using his or her own money. Also, if grandparents want to help pay for college, ask them to keep the money in their own name, and give it to the child following graduation to help repay loans.

3. Move Money Out of a Traditional Account

In addition to reducing the student’s assets, reduce parental “liquid” assets as well. Since money in regular checking, savings, and investment accounts is viewed by financial aid offices as liquid (meaning you could spend it on college), having large amounts of stocks, bonds, and cash in these accounts can be harmful.

Moving money into IRAs and other retirement accounts shields that money from colleges. Money in fixed annuities and permanent life insurance also is not be considered to be available for college. However, money put into most of these products makes the funds illiquid and irretrievable until you reach retirement age.

If you can, start moving your funds to a Roth IRA account a few years prior to your child’s college start date. Contributions to a Roth can be withdrawn at any time, but if you are less than 50 years of age, you can only contribute $5,000 per year to a Roth.

4. Pay Off Consumer Debt

It may be wise to pay off consumer debts such as high credit balances and car loans. When doing a needs analysis, college financial aid offices don’t count these burdens against your ability to pay for school, so there’s no benefit to having them. Using free cash to pay off loans will lower your balances in liquid accounts and reduce the high interest rates you pay. By lowering your liquid assets, you can help your child qualify for more financial aid.

5. Tap Your Home Equity If You Can

Taking out a mortgage or tapping a home equity line of credit will reduce the amount of equity you have in your home. Since private schools view home equity as an option to pay for tuition, utilizing this strategy can increase your chances of receiving financial aid if your child is attending a private college.

You could use the money you pull out of your home to pay down high interest consumer debt – but pay close attention to the interest rate. It probably wouldn’t make sense to take on a home equity loan at 8% to pay off debt at 5%. But if money is cheap, pulling it out of your house to pay off other debts can help you qualify for financial aid at a private institution.

Final Word

The economics of education are very complicated and can overwhelm anyone. But bettering your child’s chance of receiving financial aid is only one step in the college planning process – complement these efforts by saving and investing money for college in a 529 plan or other tax-advantaged vehicle. And remember, it’s never too early to start planning.

What steps have you taken to plan for your child’s college education and increase your chances of receiving financial aid?

(photo credit: Shutterstock, Bigstock)

Evan Pierce
Evan Pierce has spent nearly 20 years as a commodity trader and market analyst. He is registered with the National Futures Association as a Commodity Trading Advisor (CTA) and has written and edited his own newsletter, The Position Sheet. He grew up in New Providence, New Jersey and now lives in Norwich, Vermont with his wife, three children, and their two Golden Retrievers.

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Comments

  • Galen Graber

    Whenever I see articles like this, I cringe. While all the information is factual and correct, I would caution families against making decisions on their own based on this information. I once had a family use all their liquid assets to put on a home they couldn’t afford (because the federal formula does not count home assets) and then they couldn’t afford the mortgage payments, nor did they have the assets to send their son to the school he really wanted to attend and where he would thrive. The families who have the freedom to make the decisions suggested here are not the kinds of families who qualify for a Pell grant, and in the majority of cases, these actions will not increase the amount of gift aid these types of families receive. For some, they will, but the risk of making the wrong decision is great. And unfortunately there are very few people in this country who understand the federal formula AND are financial experts AND understand that what might maximize aid at School A, may not at School B. And in this case 2 out of three isn’t good enough.

  • http://twitter.com/jasonchanning Jason Channing

    Be emancipated if your rich. That’s how rich people could go to college for free. Have your child emancipated and married. Make sure they get a low income 8 hour job.

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