Source: Zuma Press
The article below appeared in the Wall Street Journal this past weekend. It provides several strategies for higher income individuals to put themselves in a position for need based financial aid. While the article is quite informative and outlays several strategies that I encourage our clients to use, in reality, the most effective strategy for upper income individuals is to encourage your children get good grades and high scores on the SAT/ACT in order to qualify for merit benefits.
Jon Houk, CFP®
College Aid for the Affluent
How parents with above-average income can try to lower a tuition bill.
By: AnnaMaria Andriotis
Most affluent families with college-age children don’t qualify for financial aid. But there are several moves that parents with above-average income can make before applying for aid that could result in a lower tuition bill.
Nearly half of all undergraduates received grants based on financial need in 2011-12, the most recent year for which U.S. Education Department survey data are available, according to an analysis by Mark Kantrowitz, senior vice president with Las Vegas-based Edvisors.com, which tracks financial aid. The average recipient received $4,787 in grants, up 20% from four years earlier.
But only 14% of students whose families have $100,000 or more in adjusted gross income received need-based grants for that year, according to the analysis. The rest either didn’t apply or didn’t qualify.
Families with that level of income face growing challenges as college costs continue to rise. Many are too well-off to qualify for aid yet don’t earn enough to pay for the full cost of higher education.
Rachel Storch, who is 20 years old and a junior at Rowan University in Glassboro, N.J., says she didn’t qualify for need-based aid because her father, a physician specializing in internal medicine, earns too much.
Ms. Storch and her father have taken out federal loans to help cover tuition, she says. “We’ll just keep taking loans until I graduate,” she says. “We’ve kind of accepted it as inevitable.”
President Barack Obama on Friday announced a new initiative to encourage more students to file for financial aid, with the goal of helping more students graduate from college.
Many families can increase the amount of financial aid they qualify for by lowering their income in the calendar year before they submit the aid application, and by shifting assets into certain types of accounts before they file.
The key is understanding how the Free Application for Federal Student Aid form works. The Fafsa is used to determine the amount of federal and state aid a family will receive, and most colleges use it to calculate how much additional need-based aid they provide.
On the form, families must report their annual income, including pretax contributions to 401(k) retirement accounts and the like. They also must report assets such as bank and brokerage accounts, though certain assets, such as a primary residence and existing balances in retirement accounts, are excluded from consideration.
As a result, money in one type of account could be used to calculate a family’s contribution, but money held in another might not. For instance, parents can move money out of a bank account and deposit it into an individual retirement account, says Rod Bugarin, a former financial-aid officer at Brown University and Columbia University who now works at Aristotle Circle, an admissions and financial-aid advisory firm in New York.
About 260 colleges, many of them selective private ones, also require families to submit a separate form called the College Scholarship Service Financial Aid Profile to determine eligibility for need-based aid directly from the colleges.
Here are several steps families can take to boost their chances of getting assistance:
Move a student’s funds into protected accounts.
The Fafsa formula puts extra weight on a student’s own assets and requires families to contribute 20% of the value of certain student assets toward college costs.
As a result, families who are preparing to file the Fafsa may want to transfer a student’s assets into a 529 college-savings plan or a Coverdell Education Savings Account. Those accounts are treated as parental assets and are tapped at a lower rate.
Be careful, though: Only cash can be deposited in such accounts, and if the child’s assets are in stocks or other investments that need to be sold before the transfer, that could trigger capital gains that could result in less aid—as well as increase a tax bill.
Families also may want to consider paying for the early years of college with the student’s money, which should result in bigger aid awards down the road as the student’s assets are depleted, says Deborah Fox, a financial planner in San Diego who specializes in college planning.
Postpone making cash gifts.
Families also may want to ask relatives to hold off on giving cash to students before they apply for aid. Those gifts will count as student income on the Fafsa, and students are expected to contribute up to half their income toward college, Mr. Kantrowitz says.
Funds in a trust set up for the student’s benefit also count as assets for the purposes of calculating aid, even if the beneficiary can’t access that cash for years. A large trust could wipe out any shot at financial aid.
Make the most of tax benefits.
Many married couples filing jointly with adjusted gross income of up to $160,000 ($80,000 for singles) can claim the full American Opportunity Tax Credit on their federal returns. The credit is worth 100% of the first $2,000 spent per student during a given tax year on tuition, fees, textbooks and other class materials, and 25% of the next $2,000 spent. The credit can be claimed for up to four years of college education.
Most parents aiming to claim the credit should wait to use any available 529 funds until after spending that $4,000, because the credit is worth more to them than the tax savings that 529 withdrawals provide, experts say.
Avoid home-equity loans.
The proceeds from home-equity loans, which allow homeowners to tap equity to pay for renovations or other expenses, are treated as assets on the Fafsa. As a result, borrowing money to build an addition could result in less financial aid.
There is an alternative: Families can set up a home-equity line of credit, drawing funds after filing the Fafsa one year and spending the cash before they file the next year.
