Want your student to get help paying for their education? Be smart about your strategy for FAFSA success.
Most colleges and universities in the United States, including public schools, use the free Federal Student Aid app to calculate your “expected family contribution” or the amount a family can afford to pay for. tuition, room and board, books and other college-related costs.
The difference between the price of a school sticker and the expected family contribution is the amount of aid based on needs for which a student is eligible. This assistance may take the form of government grants, grants provided by schools, work-study or loans.
Families must complete the FAFSA for each year of study. Because it is based on financial information that is two years old, it pays to start strategizing while your student is still in high school. But even if you haven’t started plotting early, you can still do last-minute moves that will help you maximize the financial aid.
Here are seven ways to make sure you’re getting as much money as possible from the FAFSA:
1. Complete the financial aid application
Some families don’t complete the FAFSA at all, and that’s a big mistake, says Jason Anderson, college and student loan planner in Overland Park, KS. Even if you do not qualify for grants, which do not need to be repaid, completing the FAFSA allows you to access low cost student loans. Without it, you may also miss out on state scholarship programs.
“Virtually all students who fill out this FAFSA form will receive help paying for their education,” Anderson continues. “Families who choose not to fill it out really end up getting ringed. “
2. Keep taxable student income around $ 7,000
For the 2022 school year – which takes into account income for 2020 – a student can earn and keep $ 7,040 outside of the aid package. Half of every dollar above this line counts towards the expected family contribution and therefore reduces your eligibility for assistance. At $ 15 an hour, a student would have to work 40 hours a week for almost 12 weeks in a summer job to make that much money.
If your student earns more than this protected amount, it’s not the worst decision you can make. But think of it this way: Working beyond that $ 7,040 is basically paid at half the hourly rate listed, because every dollar earned reduces your eligibility for assistance by 50 cents. Choose shifts with this information in mind.
3. Minimize student assets
The FAFSA also examines student assets, calculating that 20% of a student’s savings and investments will go towards the expected family contribution. Assets in a UTMA or UGMA account, bank accounts, and non-retirement investment accounts are all fair game.
Take-out? It makes sense to spend these student accounts. If a student has substantial assets or has a UTMA or UGMA account, consider using that money to pay for expenses before college. Tuition in a private school, car, class, musical instrument, braces, or educational trip are all ways to spend an account. Plan to complete this withdrawal by the end of the student’s second year of high school, so it does not appear on the FAFSA application for the first year of middle school.
If you have more time to plan, consider starting a 529 plan, which counts as a parenting asset, rather than a UTMA or UGMA. And if your student has extra money in a savings or checking account, consider opening a Roth IRA on custody. As a retirement account, its contents are protected by the FAFSA formula.
4. Defer parental income
The formula “gives you a living allowance based on taxes and household size, then 22% to 47% of your adjusted income after that is a fair game,” says Mark Struthers, financial advisor in Chanhassen, MN.
The exact amount depends on a complicated calculation that takes into account the age of the parents, the number of children and other factors.
“As a very rough stage, you will pay 20-25% of gross income for college expenses if your annual family income is between $ 150,000 and $ 200,000,” says Struthers.
This drops to about 5% for families earning about $ 50,000 and to 10% for families earning about $ 75,000.
If you can, carry over parental income. Parents who work a standard 9 to 5 job with no bonuses or stock options may not have a lot of money to do it. Parents with more flexible situations may have more choices. If you have stock options, do not exercise them during the year reflected in the request for assistance. Ask if the bonuses can be deferred. If you own a business, speed up spending and delay sending invoices.
5. Do not report assets that the FAFSA does not measure
The FAFSA does not take into account the value of a family’s primary residence or retirement savings. Sometimes people list them anyway, Anderson says. It is a mistake.
“It can make you look a lot richer than you are,” he says – and it could mean less financial aid.
6. Minimize parental assets that are measured
The FAFSA counts up to 5.64% of unprotected parental assets in the expected family contribution. Unprotected assets include savings and chequing accounts, cash, equity in any business with more than 100 full-time employees, a farm that is not the family’s primary residence, investment accounts, vacation or investment properties, 529 accounts and tax credits.
You probably need some of the money you stashed in the bank to pay your bills, including school fees. Additionally, you should aim to maintain an emergency cushion of three to six months of household expenses. Reduce account balances that exceed your needs by paying off (or lowering) student loans, auto loans, and credit cards before submitting the FAFSA.
If you’re paying off a mortgage, you’ll need to decide whether to pay off the mortgage on your primary residence or a second home (if you have one). The game that maximizes financial aid is to pay off the mortgage on your primary residence. The FAFSA does not take into account the equity in a family home, but does take a share of equity in vacation and investment properties.
At the same time, interest rates on owner-occupied properties are near their historic lows, and rates are generally higher for vacation and investment properties. You would save more money on debt repayment by paying off a higher rate loan on your beach house or rented condominium. A financial planner can help you decide whether to make financial aid a priority or just pay off the most expensive debt.
If you have no debts to repay, you can transfer your savings to protected assets by maximizing HSA contributions to pay future medical bills (you can contribute up to $ 7,200 per year for a family in 2021), or by contributing to a Roth or other retirement account.
You can also use your savings to pay for renovations and repairs to your home, make estimated tax payments (you’re always free to pay the IRS before the quarterly schedule), or make any large charitable contribution you consider.
7. Plan how you are going to spend money in a 529 plan
A 529 plan owned by parents counts as a parent asset. In some families, the grandparents have a 529 plan and indicate a grandchild as a beneficiary. This asset does not show up on the FAFSA, but when the money comes out of the 529 plan to pay for college expenses, that withdrawal counts as income for the student. (If you’ve taken notes, you’ll remember that student income counts more in aid than parental income.)
To work around this problem, do not tap the 529 owned by grandparents until the student’s first year of college if you can afford to wait. Because the FAFSA is dependent on a two-year financial snapshot, it won’t see the 529 take-out.
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