10 Smart Ways to Maximize Your FAFSA
And Get More Financial Aid...
The Free Application for Federal Student Aid (or FAFSA) is used by colleges and universities to determine who should receive federal grants, work-study, and student loans.
The income and tax information you put on the FAFSA will play an enormous role in determining how much aid -- and which kinds of aid -- the student will be eligible to receive.
Following these 10 steps can maximize your financial aid eligibility and help you get more financial aid.
What Is the Goal Here?
First, understand that the Expected Family Contribution (or EFC) is the amount the student and his or her family will be expected to contribute out of pocket. The EFC is determined by the information put on the FAFSA, so the goal is to plan carefully and keep the EFC as low as possible. A low EFC will mean more eligibility for financial aid.
1. Start Planning Early: The tax and income information required by the FAFSA is based on income from the previous year. This is considered the "base year." So the earlier you can start planning, the better.
2. Reduce Your "Base-Year" Adjusted Gross Income: The number one goal for the parent should be to reduce his or her adjusted gross income and total worth during the base year. Remember that the base year is the year PRIOR to the year the FAFSA is being submitted.
3: Spend Student Assets First: If the student has any money or assets in his or her name, use those funds first because that will allow you to reduce the amount you report on the FAFSA. Student assets are assessed higher than parent assets for the purposes of financial aid. Keep in mind that assets of other siblings are not reported on the FAFSA.
4. Asset Planning: Holding certain types of assets will reduce your eligibility for aid. But the thing to remember is that this is primarily based on ownership of the asset. A tax adviser may be able to advise you regarding adjusting the ownership of certain assets. Also, consider increased investment in non-countable assets during your base year. Non-countable assets are not used in the FAFSA analysis formula. Non-countable assets include retirement plan assets, your personal residence, life insurance, annuities and personal property like cars and boats. Keep in mind that adding consumer debt will not help, but increasing your investment spending or business debt can mean more aid.
5. Make Those Big Purchases: If you have money to spend on big purchases such has a home remodel or a new car, buy those things before you submit the FAFSA. These non-countable asset purchases will reduce the assets you will need to report on the FAFSA.
6. Open a 529 Plan: Putting money in a 529 college savings plan is a good idea because the FAFSA analysis formula will put less weight on these funds. An even better idea is to have a grandparent own the 529 plan, because it will not be used in the FAFSA analysis formula at all.
7. Minimize Capital Gains Earnings: Capital gains are treated as income. Avoid collecting capital gains during your base year.
8. Put Two or More Children in College: Having two children enroll in college at the same time will greatly increase their financial aid eligibility. If there are two college-aged kids in the house that are nearly the same age, it might make sense to have one student wait until both siblings can enroll in the same year.
9. Do Not Dip into Your Retirement Funds: As a rule, you should avoid using retirement funds for education financing. Retirement funds are non-countable assets so spending some of that money will not help you with the FAFSA analysis formula. Use liquid assets and savings first, as this will reduce the amount of assets you will have to report on the FAFSA.
10. Consider a Parent PLUS Loan: The Federal PLUS Loan allows parents to borrow on behalf of their undergraduate student. These loans come with an 8.5% fixed interest rate and can be used to cover 100 percent of all remaining education expenses. After graduation, these loans can be converted into a home equity loan or line of credit. After such a conversion, the interest payments on the home equity loan or line of credit can be deducted on the parent 1040 tax return.
Be sure to consult a tax adviser before using any of these strategies.