Some students are fortunate enough to have grandparents with the
resources and desire to help pay for their education. Unfortunately, some
of the actions grandparents typically consider can reduce a financial aid
package.
As noted above, setting up a custodial account for a grandchild could
potentially reduce a financial aid package.
Some grandparents know they can write a check directly to an
educational institution without incurring any gift-tax consequences.
"But each dollar that a grandparent contributes to tuition can
reduce a financial aid package by a dollar," says Kalman Chany of
Campus Consultants, a college aid counseling firm in New York City.
"Colleges consider money from grandparents the same way they do
third-party scholarships -- as extra resources the family has that reduce
the family's need for help from the school."
Some grandparents establish trusts for their grandchildren. But
financial planner Mark Singer of Safe Harbor Retirement Planning in Lynn,
Massachusetts, notes that financial aid officers can take a cynical view
toward students with trusts. "The assumption is that "trust-fund
babies" don't need financial assistance."
Because the trusts are in the children's names, trusts can also reduce
aid the same way custodial accounts do.
Stipulating that grandchildren can't get access to money held in trust
for them until they reach age 25 or 30 does not stop colleges from
considering the trust money part of the student's assets.
For families hoping to receive aid, the "best thing
generous-minded grandparents can do is give the money directly to the
parents," suggests Singer. "The parents can then invest it or
put it toward tuition payments."
As Chany notes, grandparents could also consider helping students pay
off loans after graduation.
3. Begin planning for aid before your child's junior year - or sooner.
Every high school student with an eye toward college knows that his or
her junior year is critical. That is the year college admission officers
closely examine when evaluating whether a student is academically suitable
for their schools.
But many parents hoping to qualify for financial aid don't realize
their son's or daughter's junior year is equally critical for them. When
college aid officers review a family's financial need, they scrutinize the
family's income and assets in the calendar year that begins when the
student is a high school junior.
4. Understand how the process of applying for financial aid works.
If you hope to receive any assistance with meeting college expenses,
you must complete the Free Application for Federal Student Aid (FAFSA).
This is the federal government's standard form. It is used to determine a
student's eligibility for government grants, work-study programs,
federally subsidized loans, and, in most cases, state grants.
You won't begin working on the FAFSA until after January 1 of the year
your child is a high school senior. But you'll be asked to report your
income for the previous calendar year -- the "base-income year"
that will be used to evaluate your family's financial need for your
child's freshman year of college.
You file the FAFSA with the Department of Education. It uses a formula
to determine your eligibility for aid and what your family will be
expected to contribute to your child's education. The formula takes into
account parents' earnings, savings, and investments, and other factors
such as the parents' ages, the size of the family, and the number of other
children in college. You'll be informed of your expected family
contribution in a Student Aid Report sent to you and all the colleges you
designated on the FAFSA.
Most private schools will ask you to complete an additional form, the
CSS PROFILE. The PROFILE asks for information the FAFSA does not. For
example, you'll be asked to report the value of your house.
Most schools don't ask any questions about money you've accumulated in
retirement plans. But the financial aid forms will ask you to list
voluntary contributions you made to retirement plans during the
base-income year.
After your family's expected contribution has been calculated, that
amount gets subtracted from the school's cost of attendance. The cost of
attendance includes tuition, room and board, books and supplies,
transportation, and an allowance for personal expenses.
If your expected family contribution is less than the school's cost of
attendance, the college financial aid office will come up with an offer of
aid. The package may include need- or merit-based scholarships from the
school, federal grants, a federal work-study job, federally sponsored
student loans, and state grants.
5. Consider various ways to reposition your income and your assets.
If parents begin planning at the start of their children's junior years
of high school -- before the base-income year begins -- they'll have time
to shift their income and assets in ways that may help them qualify for
more aid. Following are a few possible ways to do that. Your adviser can
suggest more. Before undertaking any of the measures outlined below,
consult with your financial and tax advisers to make sure these
suggestions don't conflict with your need to earn income, lower taxes,
manage debt, or invest for retirement.
Shift income out of the base-income year. People who work for
themselves or have their own businesses may have some control over when
they receive their income.
Even people with regular paychecks from corporate jobs may be able to
influence when they receive income. "Someone who has earned an
exceptionally high annual bonus might ask their employer if he could
receive the bonus by December 31, so that it does not have to be included
in the base-income year," says Singer.
Minimize capital gains. You'll have to include capital gains as
income on the financial aid forms. If you plan to sell any highly
appreciated investments, such as stock fund shares, you may want to do so
before the base-income year. Shifting out of stock funds you've earmarked
for college savings a few years before your child is ready to enroll in
college could also be an effective asset allocation strategy.
Don't receive state income tax refunds. If you itemize deductions,
refunds of state income taxes have to be reported on your federal tax
returns the next year. As a result, your state refunds get reported as
income on college financial aid forms.
In anticipation of having to fill out the air forms, you may want to
decrease the withholding of state taxes from your regular paycheck. That
way, you can reduce or eliminate the state tax refund you might receive
during the base-income year.
Bunch medical expenses. On your federal tax returns, you can claim
deductions for out-of-pocket medical expenses only if these expenses
exceed 7.5% of your adjusted gross income. But the PROFILE form sets a
lower limit. You can report any unreimbursed medical expenses as long as
they surpass 4% of your total income. "You could try to buy all the
family's eyeglasses in the base-income year," says Chany. "If a
younger child needs braces, you might try to pay the orthodontia bills in
the base-income year." Doing so could help your qualify for more aid.
Consolidate debt. You can't report credit card debt on your
financial aid forms. But if you have substantial balances on cards, you
could consolidate your debt by taking out a home-equity loan.
Remember, certain schools consider the equity in your home part of our
assets. Because a home-equity loan reduces your equity, a loan might help
you qualify for more aid.
You'll have to report what your investments and assets are worth as of
the date you complete the financial aid forms. If you've been setting
money aside to make a big purchase -- such as a new car -- you may want to
make that purchase and, thereby, reduce your saving or investment assets
before filling out the financial aid forms.
Hold off cashing in your U.S. savings bonds. Many parents save for
college with U.S. savings bonds. But most of the money you receive when
cashing in a bond is interest income. If you cash in the bond during the
base-income year, colleges will get a distorted picture of how much
interest income you earn each year.
"If you haven't been paying income taxes on the interest from your
bonds each year as it accrued, you may want to hold off cashing in the
bonds," says Chany. "You're not required to redeem U.S. savings
bonds in the year they mature. You can simply hold on to them and redeem
them later. With Series E and EE bonds, you may even be able to roll the
money over into Series H or HH bonds.
"If you do need to cash in the bonds, you may want to write a
letter to the colleges while you're sending in aid information so that
they have an addendum in your file to note this isn't the typical amount
of interest income you earn each year."
Watch what your child earns each year. Your son's or daughter's
earnings will also have to be reported on the financial aid forms. If an
incoming freshman has income over a certain amount in a given year --
currently around $2,400 -- colleges will assume that fifty cents of every
dollar over that amount should go toward the cost of the student's
education. If you children's incomes are approaching that amount, you
might suggest they cut back on their work hours. Their time may be better
spent hitting the books.
Be cautious. Chany cautions parents to remember that every college
aid planning strategy needs to be tailored to the schools where their
children are applying.
"Some private schools won't consider the equity in your home a
financial resource if your annual income is less than $90,000 or if your
total assets are worth less than $150,000," he says. "In those
circumstances, consolidating debt with a home-equity loan won't help the
parents receive more aid."
Working with a professional consultant who is familiar with colleges'
aid policies can help parents make sure they take the appropriate steps
for the schools their children hope to attend, he says.
