WANT TO BOOST your family’s aid eligibility? Consider these strategies:
- Use taxable account savings to pay down debt. Consumer debts such as credit card balances and auto loans are ignored by the aid formulas, so they won’t make you appear needier, while paying them off will reduce the money you have in regular taxable accounts, which is assessed. You might also use spare cash to pay down mortgage debt and make necessary purchases, such as buying a new car or replacing the roof.
- Stash college savings in the parents’ names or in Coverdell and 529 plans. Don’t use UGMA or UTMA accounts, which are considered the child’s asset and assessed more heavily for financial aid purposes. If you have money in your child’s name, consider spending it before applying for financial aid by using it to pay for items, such as summer camp, that are not considered part of the usual parental obligation. You could also liquidate the UGMA or UTMA account and use the proceeds to fund a 529 plan, though this may trigger a big capital gain, part of which could be taxed at the parents’ rate because of the kiddie tax.
- Hold down your income during the years used to assess aid eligibility. Avoid realizing capital gains in your taxable accounts or, if you do, try to take offsetting capital losses. Also avoid tapping retirement accounts to pay college expenses. See if your employer will postpone paying your year-end bonus. These various steps are especially important in the base year for assessing financial aid eligibility. Historically, that has been the calendar year that covers the second half of a student’s junior year in high school and the initial months of his or her senior year. But under new rules, the year analyzed has been bumped back by 12 months. For instance, for students attending college in 2019–20, the federal formula will look not at the 2018 tax year, but at 2017 instead. Aid applications can now be filed in October for the following academic year, rather than in January, as happened under the old rules.
- Max out savings in retirement accounts. Tax-deductible contributions won’t reduce your income for aid purposes, but it will help when it comes to assessing your assets. Money in retirement accounts is typically ignored in the aid formulas, while taxable account savings will reduce aid eligibility, so you might focus on fully funding 401(k) plans and IRAs in the years running up to college.
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