1. Understand the process.
“You need to know how the needs analysis works, what assets are counted and who must file,” Kantrowitz said. “A major change this year is that FAFSA will collect income and other information from a dependent student’s legal parents, regardless of marital status or gender. The income of both partners of same-sex couples will be considered.”
Understanding the FAFSA form is the best way to avoid mistakes and time-
consuming questions later.
2. Use an Expected Family Contribution calculator.
“They are available on many websites. Getting an early estimate of your aid eligibility and expected family contribution is smart planning. It will let you address some issues before you apply,” he said.
Financial aid is based on parent’s income and assets from the year before their child attends college. The form for the 2014-15 academic year will collect information from 2013.
3. Reduce taxable income.
You might ask your employer to delay a salary increase or large bonus until after Jan. 1. Maximizing contributions to tax-exempt retirement accounts can also reduce taxable income.
“In certain circumstances, a slight decrease in income could have significant advantages,” Kantrowitz said.
If parents have an adjusted gross income of less than $50,000, and all family members are eligible to file an IRS Form 1040A or 1040EZ, the family qualifies for the Simplified Needs Test, which disregards assets when determining financial aid. If parental income is less than $24,000, the Expected Family Contribution is zero.
4. Minimize capital gains.
If you make money from the sale of stocks and bonds the year before you or your child starts college, it will be counted as income.
“One way to offset the gains is to sell some of the losers in your portfolio so that you incur some losses,” Kantrowitz said.
5. Don’t use money from retirement accounts.
“Retirement funds are sheltered from the need analysis formula. If you withdraw money before you file, you will have converted it to an included asset,” he said.
6. Spend down savings.
“Cash in the bank is considered an asset. You can reduce it by paying off credit cards and car loans, prepaying your mortgage or making a large household purchase before you file,” Kantrowitz said. “Keep an emergency fund. Remember that the FAFSA formula shelters $35,000 to $60,000 of parental assets, depending on the age of the older parent.”
7. Move money out of children’s bank and brokerage accounts.
The formula assumes that students can spend 20 percent of their assets on college; for parents, the rate is only 5.6 percent.
“An exception are 529 college savings plans, prepaid tuition plans and Coverdell Education Savings Accounts in the child’s name with the child as the beneficiary, which are assessed at the parent’s rate,” he said. “You’ll want to make these changes in time for the switch to appear on a verifiable statement as proof.”
8. Spend a child’s assets first.
“If your child has saved $10,000 for college, use it all the first year in order for him to show fewer assets and receive greater awards in subsequent years,” Kantrowitz said. “You can reduce student assets the year before he enrolls by purchasing a car for commuting to class or computer that will be used for college.”
9. File early.
“Don’t wait until your child is accepted to college to apply for aid,” Kantrowitz said. “Some states and schools give out aid on a first-come, first-served basis.
10. Know your deadlines.
“Either do your taxes early or file using estimated data from your last pay stub and 1099s. Take asset data from your most recent brokerage and bank statements. Once you’ve filed your taxes, you can amend the data using the IRS Data Retrieval Tool on the FAFSA website. Using this tool will also decrease your chances of being asked to verify your information through documentation.”
11. Fill out the form completely and honestly.
Only use financial planning strategies that are ethical and legal. There are stiff penalties for student aid received under false circumstances.