For parents who anticipate their child/children will attend college, part of the process will usually include compiling personal financial documentation to apply for grants, loans and scholarships. While much merit-based financial assistance exists to help students pay for college, the greater percentage of aid is needs-based; in general, those with lower incomes and fewer eligible assets will receive more funds.
However, there are several determining factors in the financial aid application process which can be preemptively adjusted to improve your household’s financial eligibility. For example, home equity, retirement accounts and life insurance cash values are not counted as family assets when calculating eligibility. This means some households may benefit from repositioning existing funds by making extra principal payments on a mortgage, increasing contributions to retirement accounts, or adding to cash values. Another big planning opportunity is preparing for your household’s base income year.
Beginning on January 1 of a student’s junior year in high school, this base income year is the one that counts most in determining a family’s eligibility for aid. Since income and assets acquired during this year set a baseline for subsequent years, there is strong incentive (from a financial aid standpoint) to depress income. This can be accomplished through several avenues, including:
- Postponing retirement distributions to the next year
- Avoiding the sale of any assets (such as real estate, stocks or bonds) that would trigger capital gains
- Incurring as many deductible expenses as possible (applicable primarily to self-employed or business owners)
- Pre-paying property taxes
- Properly titling accounts (20% of the balance in an account with the student’s name is considered available for college expenses, while only 5.64% is considered from parents’ accounts)
A bit of prudent asset re-positioning might pay dividends in increased financial aid.
IF COLLEGE IS IN THE FUTURE FOR YOUR CHILD, YOUR FINANCIAL PROFESSIONALS SHOULD KNOW ABOUT YOUR PLANS.
HAVE YOU PREPPED FOR YOUR BASE INCOME YEAR?