POSITIONING YOUR INCOME/ASSETS TO ENHANCE FINANCIAL AID ELIGIBILITY

Definition

There are a number of strategies you can implement to try to enhance the amount of federal financial aid your child receives. These strategies take advantage of the federal methodology rules about which family income and assets are included in determining your family's expected family contribution (EFC). Lowering your EFC raises your child's eligibility for federal financial aid.

Strategies to Reduce Income Factored into the EFC

  • Time the receipt of discretionary income to avoid the base year, which is the year prior to the year you fill out the federal government's aid application (the Free Application for Federal Student Aid, or FAFSA)
  • Pay all federal and state income taxes due during the base year, which will reduce assessable cash and increase your tax deduction on the FAFSA
  • Have your child limit his or her income for the base year to the amount of the student income protection allowance ($3,750 for the 2009/2010 academic year)

Strategies to Reduce Assets Factored into the EFC

  • Use cash (an assessable asset) to pay down consumer debt, which is not a factor in the federal methodology
  • Use cash to make large planned purchases the year before your child starts college
  • Use assets assessable under the federal methodology to pay down your mortgage, which increases your home equity (an excludable asset)
  • Shift assessable assets above your asset protection allowance (a sum automatically excluded from consideration) to assets excluded by the federal methodology (e.g., home equity, retirement plans, cash value life insurance, annuities)
  • Use your child's assets to pay for the first year of college, which reduces (for subsequent years) the student asset contribution that the federal methodology factors into the EFC

Points to Keep in Mind

  • Colleges don't use the same formula as the federal government in determining financial aid eligibility--their formula (the institutional methodology) is generally stricter
  • Any increased financial aid your child receives may consist entirely of loans, not grants or scholarships
  • Be careful about disrupting an otherwise sound investment program