Is there anything I can do now so that my child can obtain more financial aid later?
Yes, there are steps you can take now that may help your child obtain more financial aid later. All federally funded financial aid programs use a formula known as the federal methodology to determine how much money a family must contribute toward a child's educational costs before becoming eligible for financial aid. This figure is known as the expected family contribution (EFC). The difference between your EFC and the cost of your child's college equals your child's financial need. The greater your EFC, the lower your child's financial need and the less aid your child will be eligible for.
To determine your EFC, the federal methodology considers the value of your family's income and assets in the calendar year before the year that your child applies for aid. This year is known as the base year. Thus, lowering your income and assets in the base year can lower your EFC and increase your child's financial aid eligibility. It's important to note that these strategies aren't meant to subvert the financial aid rules in any way. Instead, they simply take advantage of the rules regarding what is counted.
To lower your income and assets in the base year, you might try to:
- Defer employment bonuses until after December 31
- Sell investments that can be taken as a loss (if they're not expected to recover)
- Avoid selling investments that will incur capital gains or interest
- Avoid pension plan and IRA distributions
- Pay all federal and state income taxes due during the base year (this reduces your available cash--a countable asset--and you're allowed to deduct taxes you paid during the base year on the financial aid application)
- Use available cash to reduce outstanding consumer debt or to make large planned purchases
In addition to taking steps during the base year to lower your available income and assets, you can take steps several years before the time your child applies for aid. Generally, such strategies work best with your assets. Specifically, the federal methodology excludes four types of assets from consideration when determining how much your family is expected to contribute to college costs. These assets are home equity (in a primary residence only), all types of retirement plans, annuities, and cash value life insurance. So, all other things being equal, you might consider putting more of your cash in one or more of these vehicles because they aren't counted for financial aid purposes.
One final note: Just because your child is eligible for more financial aid doesn't necessarily mean that more of the aid will be in the form of favorable grants or scholarships. Your child may simply end up with more loans that will need to be repaid at some future date.