Eliminate Costly Mistakes Increases Financial Aid
When you play chess it is all about “strategy” and understanding the process of several moves ahead compared to your opponent.
Financial Aid rules are like chess, you must be “strategic” while understanding how different financial moves can impact your financial aid eligibility toward how your expected family contribution will be calculated.
This is a “primer” to provide an overview of the importance of planning ahead in the process of maximizing your financial aid and reduce the use of loans to pay for college.
Anytime there an abundance of rules with a legislative act there are usually “loopholes”. Similar to the tax code, the financial aid regulations “as is” do allow for certain strategic techniques to provide a favorable impact for families.
Our purpose here is to merely provide an overview of how Coach for College (“Jim Kuhner”) can be of value to your family.
Understand the Basics Income and Assets | Student | Parent/s
The primary trigger in financial aid formulas is income and then assets.
Parents and Students are assessed with their own income and assets separately to arrive at the total Family Expected Family Contribution (“EFC”). Student rates are higher.
[Strategy Alert] Don’t leave money in the student’s name when possible. If not possible, spend it before parents money in the first year.
It is important to get an “early read” on the family’s EFC to determine whether “needs based” financial aid might be possible. Here is why.
The strategy is different as to who owns what compared to the Parents and the Student/s.
If there is not financial aid possible, then income shifting, tax capacity, and creative thinking comes into play because the higher assessments rates for the student do not apply. Therefore, the overall objectives become “tax scholarships” and maximizing the tax capacity of the student.
On the other side, where financial aid upon financial need is probable, and then parents should own the assets in most situations and spend the student’s money on computers, autos, etc. if there is money available in the student’s name.
College Choice Begins with Understanding Financial Aid Methodologies
There are two financial aid forms; the FAFSA and the CSS Profile.
There are three financial aid methodologies, Federal (“FAFSA”), Institutional (“CSS PROFILE”), and Consensus 568 (“CSS PROFILE Hybrid 25 Schools”).
Income is the Primary Driver Inside the Financial Aid Calculations
Income is assessed in the “base year” which is the calendar year before the financial aid forms are submitted.
Assessment rates for income are;
- Federal Method (FAFSA) 22% – 47% (after $27,700 @ 47%)
- Institutional Method (CSS PROFILE)
- Consensus 560 Method
There is an income allowance based upon number in household counting parents and number of household students in college.
Are there ways to reduce income? Sometimes but with W-2 Families there is far less opportunity unless you set up a small business with operational losses in the beginning years. In addition there is several cash flow planning strategies that help the small business owner increase cash flow.
One big mistake is selling appreciated assets that generate “income” in the base year. This is where planning ahead prior to the base year can eliminate costly mistakes.
Strategy Alert: Client sells Apple stock adding close to $100,000 to their financial aid income when they are appealing the financial aid award with a very good chance of getting more money. Unfortunately they did not ask what the transaction would do to their financial aid income.
Does Asset Repositioning Work? It Depends Just Make Sure…
There are rules that dictate how assets are assessed. The value of an asset is the value as of the date you sign your financial aid form.
A general guideline is the value of the asset would be what you could reasonably sell the asset for within 30 days.
Assessment rates are much lower for parents than for students.This is another reason for early planning because if the family will probably qualify for need based financial aid then assets should be held in the parents name.
Assessment rates for assets are;
- Federal Method (FAFSA) Parents 5.64% and Students 20%.
- Institutional Method (CSS PROFILE) Parents 5% and Students 25%
- Consensus 568 Method Parents and Students 5%
There is an asset allowance based upon the oldest parent.
Some College Planners suggest moving your assets into annuities and cash value life insurance.
Is this wise?
It depends. Can it work? Yes
Can it backfire? Yes
It is very important to understand how the rules work, how the different schools will treat various asset repositioning strategies, and there should always be additional family “needs” beside just the financial aid motive.
Coach-for-College has over 160 strategies that can save money going to college.
Obviously they don’t all apply to every family, but many can help you keep more of your money.
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