Financial Aid and FAFSA

How can I get the most financial aid for college?

by Jane Bryant Quinn

You can manipulate the financial aid form in your favor. Of two families with exactly the same income and assets, one child may qualify for somewhat more assistance simply because the parents used all the available loopholes. Some of the measures are smart, and others are stupid. Here are the smart ones:

1. Keep your college savings in your name, not your child’s name. Smart. The schools count 20 percent of the child’s assets as available to pay education costs but only 5.64 percent of the parents’ assets (after exempting a certain amount).

2. Save in tax-favored college plans. Smart. Payments from 529 plans or Coverdell Education Savings Accounts aren’t counted as income on the FAFSA form, although private colleges may consider them. If you have been putting money into a child’s account via a Uniform Transfers to Minors Act, you can shift it, tax free, into a 529. A 529 plan maintained for your child by another relative, such as a grandparent, doesn’t show up on the disclosure forms at all.

3. Don’t touch the equity in your home. Smart. If you take a large home equity loan in preparation for four years of college costs, it becomes a cash asset that could reduce your eligibility for college aid. Instead draw on your equity only as needed for college bills.

4. Keep adding to your 401(k) and other retirement plans. Smart. You don’t have to report their value on the FAFSA form. Only your current contribution is counted.

5. Avoid taking capital gains, starting from the year before college starts until your child’s last year in school. Sometimes smart. If you sell an investment during this time period, the profit is counted as current income on the FAFSA form. It will weigh more heavily in the college aid formula than the value of unsold investments or the cash assets you have on hand. Sell any stocks you’ll need to help pay for college by your child’s junior high school year. If you have a onetime capital gain — say, from selling inherited shares — tell the school about it. Many schools will leave it out of the calculation. Avoiding a capital gain can be stupid, however, if you’ve lost faith in the stock. If its price declines, you could lose more in the market than you pick up in aid.

6. Get rid of cash savings by prepaying your mortgage or paying down a home equity loan. Sometimes smart. Home equity isn’t counted when awarding federal aid. Some private colleges don’t count it, either. You’ll have gained nothing, however, if you have to borrow it back to pay college bills.

Excerpted from Making the Most of Your Money Now by Jane Bryant Quinn

Copyright 1991, 1997, 2009, by Berrybrook Publishing, Inc. Reprinted by permission of Simon & Schuster, Inc

Buy the Book