It Takes a Village

Once again, we’ve entered the special time of year when the days get shorter, temperatures get cooler and our calendars are full of holiday bashes and family get togethers.  The sparkling lights and long lines at the mall can mean only one thing…it’s FAFSA season?

Recent changes to the Free Application for Federal Student Aid moved the opening of the filing window back to October 1st from its previous start date of January 1st.  Filers now have from October 1st, 2016 until June 30th, 2018 to file their federal financial aid applications for the 2017-2018 school year.  But that doesn’t mean you should delay.  Many types of aid are disbursed on a first come-first serve basis and some school and state deadlines have changed to “as soon as possible after October 1st.”

The world of financial aid is complex.  Improving your chances for aid takes deliberate planning years ahead of filing the FAFSA and it requires completing the form accurately once it’s time to file.  Anyone involved in helping pay for a child’s college – parents, grandparents, family, friends or the student themselves – should understand how to navigate the system to maximize potential assistance.  Here is what you need to know to do just that.

Where

Where you put college savings can make a big difference for financial aid.  Aid calculations count 20% of assets owned by a student and only 3-6% of assets owned by a parent.  This means putting money in a child-owned bank or UTMA/UGMA account will lower your odds of getting aid more than a parent-owned 529 plan.  Using a state-sponsored 529 plan also comes with the most tax advantages but for those hesitant to overfund them, you’re better off earmarking some of your own savings for college than you are putting it in your child’s name.

When

Income counts against financial aid just like assets do so it is important to avoid creating unnecessary income during the pivotal years.  50% of student income and 22-47% of parent income is counted in aid calculations.  The FAFSA now uses income data from two years earlier, so what happens as early as the child’s sophomore year of high school will be determinant in how much aid they receive.  For example, a child who will be a college freshman in 2018 will base their first FAFSA data on income from 2016.  Savings to tax-deferred plans won’t help reduce your income for FAFSA but you may be able to defer gains on investments and property or avoid distributions from your retirement accounts during this timeframe.

Who

Though well-meaning, a generous grandparent, friend or family member could unwittingly jeopardize financial aid.  Their money won’t impact financial aid until they use it for college; once they do, the funds will be counted as untaxed student income the following year.  If grandma has a 529 plan and uses $10,000 to pay for the freshman year of college, the first year FAFSA ignores the 529 plan balance but the second year must include an extra $5,000 (50%) of student income.

Third parties can avoid this by:

  • Contributing to a parent-owned 529 rather than one in their name. The 529 will be counted in the parents’ assets but distributions are ignored for financial aid.  In states like Ohio, the third party can still claim an Ohio tax-deduction for their contributions even if they don’t own the account.
  • Using money to pay for the final year of school. Since the student won’t file a FAFSA the following year, the distribution will never be counted as income against financial aid.
  • Using money to pay off student loans rather than paying the cost of college up front.

How

Completing the FAFSA can be confusing and overwhelming.  If submitting the FAFSA online, it helps to import income information from the IRS but you still have to manually calculate your net worth which can be tricky.  Overstating your assets could eliminate your chance of aid so use these tips and the FAFSA instructions to fill it out accurately.

  • Parents’ net worth excludes the home in which you live, the value of life insurance, retirement accounts (401(k)s, pensions, traditional, Roth and SEP IRAs and annuities) and custodial UTMA/UGMA accounts. It also excludes the value of a small business if at least 50% is owned and controlled by family and it has fewer than 100 employees.
  • Parents’ net worth includes other real estate net of debt, trusts, stocks, bonds, mutual funds, parent-owned 529 plans and educational savings accounts. Cash, savings and checking accounts are included on a separate line and should not be double counted in net worth.
  • Parent information must be included for both parents if married. If divorced, use the parent who the student lived with more (or who provided more financial support if they lived with both equally).  If one parent is remarried, the step-parent’s information must be included.
  • Student’s net worth should not include a parent-owned 529 plan. Students report as untaxed income any money they received from third parties like grandparents.

Why

Planning and applying for financial aid can be so cumbersome many people don’t file at all.  Even if you don’t expect to receive federal grants, it’s still worthwhile to complete the FAFSA.  You must file to receive any federal aid including Stafford loans and many universities create their aid packages based on information derived from the FAFSA.  It’s estimated that $2.7 billion dollars of federal student aid was left on the table last year from people who didn’t file a FAFSA, $92 million in Ohio alone.

As you brave the stores looking for the perfect gift for that soon-to-be college student, consider that while it’s probably not on their list, a well-crafted financial aid strategy might be the best gift you can give them.

Share this post:
  • email
  • Facebook
  • Twitter
  • StumbleUpon
  • Technorati
  • del.icio.us
  • Digg