Believe it or not, there are strategies for maximizing your eligibility for need-based student financial aid. These strategies are based on loopholes in the need analysis methodology and are completely legal. We developed these strategies by analyzing the flaws in the Federal Need Analysis Methodology.
It is quite possible that Congress will eventually eliminate many of these loopholes. Until this happens, we believe that revealing these flaws yields a more level playing field and hence a fairer need analysis process.
In the strategies that follow, the term base year refers to the tax year prior to the award year, where the award year is the academic year for which aid is requested. The need analysis process uses financial information from the base year to estimate the expected family contribution. Many of these strategies are simply methods of minimizing income during the base year. Likewise, the value of assets is determined at the time of application and may have no relation to their value during the award year.
We have not included any strategies that we consider unethical, dishonest, or illegal. For example, although we may describe some strategies for sheltering assets, we do not provide techniques for hiding assets. Likewise, we strongly discourage any family from providing false information on financial aid.
Check out top strategies for maximizing aid eligibility. For more detailed strategies for maximizing your need, click on the topics below.
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There are several basic principles behind the strategies for maximizing eligibility for financial aid. These principles include:
If you estimate your income on the Free Application for Federal Student Aid (FAFSA), don’t overestimate. Families have a natural tendency to overstate income, in part by reporting gross income (before deductions for health insurance premiums) instead of adjusted gross income. Be careful when reporting the amount of taxes paid. Many people confuse the amount of withholding (the figure from the W2s) with the amount of taxes paid. Avoid incurring capital gains during the base year, which are treated as income. Sell stocks and bonds during the sophomore year in high school. If you must sell while your child is in college, wait until April of their junior year after the financial aid application has been filed.
Do not take money out of your retirement fund to pay for educational expenses, which are sheltered from the need analysis process. If you withdraw too much money from your pension or withdraw them before the financial aid application is filed, you will have converted them into an included asset.
In certain circumstances, a slight decrease in the parents’ income may yield a significant increase in eligibility for Federal financial aid. If both of the following are true: the parents’ adjusted gross income is under $50,000 and all family members are eligible to file an IRS Form 1040A or IRS Form 1040EZ income tax return or aren’t required to file.
So if the family has a substantial amount of assets and the parents’ income is close to $50,000, the parents should consider taking steps to reduce their income below the $50,000 threshold.
Some methods of reducing the parents’ income include:
If both members of a married couple have earned income, but one falls below the income threshold for filing an income tax return and the other falls above the threshold, it may be beneficial for the member with income above the threshold to file as married filing separate. This will allow the other member to not file a return. This yields a lower AGI.
As a general rule, unless the family is completely certain that the child will not qualify for need-based aid, money should be saved in the parent’s name, not the child’s name. Putting assets in the child’s name has one major benefit and two major risks.The benefit is the tax savings due to the child’s lower tax bracket. The risks, however, often outweigh the benefits. Such a transfer of assets will result in a reduction in eligibility for financial aid, and the child is not obligated to spend the money on educational expenses.
After the child reaches the age of 18, a family can take advantage of tax savings by placing assets in the child’s name, because the income from the assets will be taxed in the child’s tax bracket. But the need analysis formulas assume that the child contributes a much greater portion of his or her assets (and income) than the parents, with the result that such tax-sheltering strategies often significantly reduce eligibility for financial aid. Parents should carefully consider the financial aid implications before transferring money into their child’s name. If parents want to transfer their child’s assets back to their name, they should do so before the base year.
The College Cost Reduction and Access Act of 2007 changed the treatment of custodial versions of qualified tuition accounts, like 529 college savings plans, prepaid tuition plans, and Coverdell education savings accounts. When they are owned by a dependent student, these plans are reported as parent assets on the Free Application for Federal Student Aid (FAFSA).
Specifically, for a custodial account to be counted as a parent asset instead of a student asset, all of the following must be true:
This provides an additional way for a parent who saved in the child’s name to undo the damage. Before filing the FAFSA, the parent should convert the asset (by liquidating it, as contributions must be in cash) into the custodial version of a 529 college savings plan, prepaid tuition plan, or Coverdell ESA. The money will then be treated as a parent asset on the FAFSA even though it is still owned by the student.
So before you spend much effort trying to optimize the parents’ assets, use Finaid’s EFC calculator in detailed mode and see whether there is any contribution from parent assets.
Many need analysis formulas to divide the parent contribution among all children in college. A family which doesn’t qualify for financial aid when one student is in school may suddenly qualify when two or more children are enrolled at the same time.
For example, suppose the need analysis formula calculates a parent contribution of $17,000 when one student is in school and a student contribution of $2,000. With college expenses of $19,000 a year, the student will have a financial need of $2,000 and will probably not be eligible for much financial aid. But next year, when the student’s sibling is also enrolled, the parent contribution is split in half. Even though the parent contribution has increased a little, to $18,000, each student is expected to receive $9,000 from their parents. With college expenses of $21,000 and a student contribution of $2,000, each student now has a financial need of $10,000 ($21,000 less an EFC of $11,000), and both will be eligible for some financial aid.
If you are a parent who is legitimately going back to school to finish your education or pick up an additional degree, provide documentation of this to the school’s financial aid administrator and ask for a professional judgment review. The school has the authority to deduct the parent’s actual education expenses from income or compensate in other ways. Since there has been a history of fraud in this area, you will have to convince the financial aid administrator that you are genuine.
A person counts as a member of the household if they get more than half their support from the student’s parents. The student is also counted, regardless of where the student gets his or her support.
The requirements for a student to be considered independent are rather strict. Only two are reasonably under the student’s control and those are:
Either of these will qualify the student as independent for the awarding of federal funds. For the awarding of institutional funds, many schools adopt a stricter stance and require evidence that the student is strictly self-supporting. A student who lives at home with his or her parents (even if he or she pays rent) and doesn’t earn a modest income probably won’t qualify.
If a student gets married after filing the FAFSA, it will have no effect on the current year’s need analysis. You can’t change your dependency status mid-year by getting married. A mid-year change in marital status will affect dependency status only in subsequent years.
Independent student status does not always lead to an increase in eligibility for financial aid. Although it does mean that the parents’ finances are not considered by the need analysis process, a student who gets married will have to include the financial information for his or her spouse.