The secret to improving your chances of financial aid
Navigating the college financial aid world can be complicated. Between all the paperwork, complicated formulas, and rules, it might even seem impossible!
But maximizing financial aid comes down to one thing: the balance between your assets, income, and debts.
To make the most of it, you’ll want to do what you can to reduce your income and assets while using debt as prudently as possible. Here’s how. 1
Reduce your income
Income is the single largest factor in calculating the “family contribution” to a child’s college expenses, so by reducing income you could potentially qualify for much more financial aid.
Most people don’t get to choose their salaries, but there are other ways to influence your income.
- Ask your employer to defer a bonus payment
- Wait to take capital gains on any investment accounts
- Wait to draw down from retirement accounts, if possible
Depending on your personal situation, the effects might be significant. If you have the opportunity to adjust your income downwards, it could be worth it!
Strategize family help to avoid raising your child’s income
Similarly, you may want to be strategic about getting help from other family members.
For example, if grandma wants to help pay for college and sends money directly to your child, it will count as income. However, if she sends payments to student loans instead, the help won’t impact your child’s income level — or his or her eligibility for financial aid.
Avoid retirement money, and maximize your contributions
Some parents are tempted to use their retirement accounts to fund their children’s educations.
If you can, avoid it.
Not only do you need to help preserve your assets for retirement, your retirement accounts are also very special from a financial aid perspective.
Retirement savings aren’t considered part of the contribution formula, meaning that they don’t count towards your overall asset base — and thus your expected family contribution.
Thus, if you have cash on hand and can afford it, this could be a very good time to raise your retirement account contribution level. Not only will this lower your level of assets available for college, it will do your retirement account some good.
Pay off your debts
Another way to reduce cash balances is to put more money towards debts before you apply for financial aid. Your debts aren’t included in your financial aid calculation: they neither help your case nor hinder it.
However, reducing your available cash can help your financial aid position.
Don’t have consumer debt? Consider prepaying your mortgage instead. This lowers your cash level and therefore your expected contribution.
Of course, in either case, make sure you can afford to eliminate that extra cash.
Consider a HELOC
If you need to borrow money for your child’s college or other needs and you own your own home, consider taking a Home Equity Line of Credit (HELOC) rather than a personal loan.
Any unused portion of a personal loan becomes an asset under the financial aid calculation. In other words, you lose on two fronts: you’re paying interest on the money and you get less financial aid.
With a HELOC, you have access to credit, but you only pay for what you use, and because you don’t carry it on your balance sheet, you won’t pay a financial aid penalty for it.
Of course, as with any loan, whether a HELOC is right for you is dependent on your personal financial situation. Talk to an advisor to find out if it’s a good idea.
Finally: Ask for a second look
After going through all the optimizing involved with financial aid, you still have one last option to get more funding: ask.
While it’s unlikely that the federal government will talk through a financial aid offer with you, colleges and universities probably will. The process is called a “professional judgment,” and it means that whatever package your institution offered your child can be reviewed, and possibly even raised.
That’s because financial aid offers aren’t set in stone: they’re based on reported finances, sure, but also on the attractiveness of the student and special situations that are difficult to quantify on paper. So don’t hesitate to call your potential schools to find out if they can improve the offer, particularly if you have competing offers from similarly-tiered schools.
Make it a priority
At the end of the day, planning for college and financial aid is an intensive and consuming process. But it can be done in a way that gets your child to the right school while also saving you money. With a little extra effort at the outset, you might be able to sail through college with a little less stress.
Now if you could only stop worrying about your child being on their own! Unfortunately, there’s no aid package available for that.