The cost of college has risen so high that even middle and higher-income parents may qualify for some financial aid. Beyond how much money you earn, how a family structures college savings and general finances in the years leading up to and during college can have an impact on how much aid you’re offered.
It wasn’t always like this. Once upon a time, students could pay their tuition at a public university with the money they earned working during summer. Now, students would have to work full-time all year to pay the average public school tuition, which has skyrocketed to $10,000 for in-state students and $25,000 for out-of-state students for the 2016-2017 school year, according to the College Board. Private colleges and universities are charging an average of more than $33,000 per year. And don’t forget, you still need to set aside money for room, board, books, and Albert Einstein posters.
All this means that most American families have a gap between what they can pay toward college and what college costs. Fortunately, a university’s published “sticker price” is not what most families pay, especially for private colleges. According to the National Center for Education Statistics, even students with household incomes of $110,000 or more received an average of $15,240 in the 2013-14 school year to defray the cost of private nonprofit colleges, and $1,860 for public schools.
And that’s just the federal grants, loans, and work study jobs. Many schools also offer institutional aid consisting of grants, scholarships, and loans. Some well-endowed schools even promise to cover the entire difference between the family’s resources and the price (usually incorporating a combination of loans and other aid types). These financial aid packages can be so large that some families pay less for the most expensive colleges than they would have paid for their local state school.
How much aid a student is offered depends on a lot of things. Much of it has to do with how a family’s finances are organized and how they fill out the Free Application for Federal Student Aid (FAFSA) from the year before their kid starts college. Let’s look at strategies for students to maximize available college funds.
1. Be strategic with college savings accounts
First of all, parents should make retirement their top savings priority, not education, because you can get loans for education, but there are no loans to fund retirement.
“It’s just like being on an airplane: Help yourself first before assisting others,” says Carol Stack, author of The Financial Aid Handbook: Getting the Education You Want for the Price You Can Afford.
Second, parents should keep any money they do save in their own names, not in a joint account or a Uniform Transfers to Minors Act (UTMA) account in the student’s name. Your assets count against you even more than your parents’ assets do. (See also: Why Saving Too Much Money for a College Fund Is a Bad Idea)
For the same reason, grandparents or other well-wishers outside the immediate household should avoid directly giving students money for college. If your grandma wants to help with college, great! She should hold onto that money in her own account, not gift it to you. As long as it’s in grandma’s name, those assets don’t get reported on the FAFSA.
Some college-savvy financial planners even advise against taking out 529 accounts, those state plans that allow money to grow tax-free but can only be spent on qualified educational expenses, because 529s opened by parents will count on the FAFSA as parental assets and increase the expected family contribution (EFC). Gary Sipos, founder of College Cash Solutions, a for-profit company that offers advice on choosing a college and getting financial aid, always warns clients against them.
“In no case in the decade or so I’ve been doing this, have I ever seen a case where a 529 plan was a good idea,” Sipos says.
In Sipos’ experience, even though these plans offer tax benefits, the harm to students’ chances of getting financial aid can cost the family as much or more than they saved in taxes.
However, most college savings experts stand by 529 plans.
“The 529 is probably going to be one of your best options,” says Joseph Orsolini, a certified financial planner with Illinois’ College Aid Planners.
If a grandparent wants to save for college in a 529 plan, they should open their own account, not contribute to one set up by the parents. This way, it’s not counted as a parental or child asset. Even then, Orsolini warns, caution is needed to avoid having the account hurt the student’s aid chances. If your grandma owns the plan and pays the first year tuition out of it, that payment is counted as your income, and could decrease the amount of aid you qualify for the next year.
“You want to withdraw starting the second half of sophomore year,” Orsolini advised. Because the FAFSA looks backward to past years’ tax returns, at this point, you’ll be in the clear and the student income from Grandma’s 529 plan won’t affect financial aid.
If you’re a student who already has money in your own name, you might consider spending that on things you’ll need for college — like test prep classes, or a new computer — before the period reported on the FAFSA. Once you start paying tuition, spend your own money before your parents spend any of theirs. If your parents want to pay your tuition, they can instead make up for it with a gift later or by helping you pay off any loans you take out.
2. Fill out the FAFSA, even if you think your family makes too much money
The FAFSA is the first step in getting need-based aid, and it’s a pain in the butt to fill out. Among other things, it asks for tax returns, your household income, and assets. High income, say over $200,000 a year, lowers your odds of receiving grants and loans, so if your household falls in that category, you may think there’s no point in going through the agony. Fill it out anyway.
There are so many factors affecting whether you will get aid — like how many people are in your family and whether any of them will be in college at the same time as you — that you might qualify for at least subsidized loans, despite high income. (See also: The 10 Most Common Financial Aid Mistakes — And How To Avoid Them)
3. File early, and accurately
The opening date for turning in the FAFSA has been moved up, and it’s important to get that thing in within about a month of opening day. If you plan to start college in the fall of 2018, that means turning in the FAFSA starting Oct. 1, 2017.
Financial aid is first come, first served, Sipos explains. If you wait until spring, financial aid officers may be running low on funds to distribute. “They might give you half the award they would have given you if you had applied a few months earlier,” he says.
In addition, if your FAFSA has errors, it can get kicked back to you for corrections and then you have to go to the back of the line.
4. Spend more time with your poorer parent
If your parents are divorced and live separately, you only have to put the income and assets from one of those households on your FAFSA. So do you put down your mother’s income or your father’s income? The rules simply say that you submit the information about the household you spent the most time in during the preceding year — even if it was only one day more.
For example, say your parents are divorced and you split your time evenly between their houses. Your mother and her new husband make $300,000 a year and have a million bucks in the bank. Your father is on disability, and has no assets beyond his house and car. If you are presented as his child, your chances of getting financial aid are greater. While you’re in high school, make sure you spend more than half the year living with your dad.
5. If you work, watch your earnings
If you, the high school or college student, earn more than $6,400 in a year, colleges will consider that as money you could be paying in tuition, and reduce need-based awards accordingly. Of course, most student jobs don’t pay much, but even at minimum wage, working 20 hours a week all year would put you over the threshold. There are many reasons you may want to work, including wanting to be self-sufficient or gaining valuable job experience. Just remember that once you pass the $6,400 per year threshold, increased tuition costs may eat up 50 cents of every dollar you earn.
Instead of working more than 15 hours a week for pay during the last year of high school, when your income must be reported on the FAFSA for your first year of college, consider spending your time doing something that will boost your college application, from studying for the SAT or ACT to doing volunteer work.
This is also a warning to parents: Paying your kids a good salary to work for you might help you taxwise, but the penalty in the financial aid application could eclipse any tax savings.
6. Don’t dismiss more expensive colleges
School aid offers can vary, based both on how much the school wants you and also how much the institution is. Once you have the financial aid promises in hand, you may be surprised at how much you’re expected to pay differs from the sticker price.
“[D]epending on a family’s income and a college’s available aid funds, the cost paid by the family for attending even the most expensive Ivy League schools may be less than the cost of attending an in-state public university,” reads Paying for College Without Going Broke by Kalman Chany, a popular primer on navigating the financial aid process.
Don’t make a final decision until you have all the aid letters in hand, because the sticker price is not an apples-to-apples comparison.
7. Don’t automatically choose the best college you got into
Many schools reserve their best merit aid offers for the top 25 percent of applicants, based on test scores, Sipos explains. That means if you barely squeak into a great school, but would be one of the top students at a good school, you’ll probably get a better aid offer from the good school. Sipos counsels families on this strategy when applying for colleges, using information schools publish about their students’ median college entrance test scores.
8. Look into whether you have to report your family’s small business income
Sipos used to be a general financial planner, but he was inspired to specialize in college financial planning when he met a couple who was drowning in debt despite having run a successful business for years. They’d sent three daughters to Ivy League schools, and because they earned a good income, and their business was worth a lot, they’d never bothered to fill out a FAFSA.
What the family didn’t know was their business met the legal description of a small business that does not count against students for financial aid purposes. Family farms fall into this category, as well. The family would have qualified for financial aid if they’d applied, Sipos says, leaving them ready to retire after their kids graduated, instead of running double time to dig out of debt.
“They could have saved $30,000 a year if they had exempted their business. The financial aid officer didn’t mention anything,” he says.
9. Put money into non-reportable assets
If your parents have car loans, credit card debt, or a mortgage, it makes good sense to pay them off as much as possible, not only to reduce their debt but also to increase the amount of aid you might be eligible for. You have to report how much money and other liquid investments your family has on the FAFSA. That means your parents’ bank accounts are considered money they could be putting toward your education. But the value of your family’s primary home and personal possessions such as cars don’t count against you in assessing your need. (See also: 5 Smart Places to Stash Your Kid’s College Savings)
10. Make sure the school knows about all special circumstances
Besides the volumes of information the FAFSA asks for, you can also include a letter explaining the family’s circumstances — and in many cases, you should. For instance, if you have a disabled sibling who needs expensive care, or another challenging circumstance, let the school know so it can take that into account when calculating your family’s ability to pay.
11. Negotiate with the financial aid office
When you get your aid letter, it’s not necessarily a “take it or leave it” proposition. You can let the school know if other schools offered you a better deal, and urge them to take another look.
If you haven’t already written a letter about special circumstances, now is the time to do that. Finally, if the year reported on the FAFSA was an unusually good year financially for your family — your mother got a huge bonus, for example, or your parents sold an investment property — you can provide previous and subsequent tax returns to support your case, Sipos advises.
12. Join the military or a public service program
Two members of my family became the first in their respective lines to go to college, thanks to the GI Bill, a program that helps service members and veterans cover education costs. That’s just one of the college benefits available to veterans and service members. It’s worth looking into.
Outside of the military, AmeriCorps, Teach for America, the Peace Corps, and the Public Service Loan Forgiveness program are all avenues for paying off student loans or financing college.
Some people might look at the above tactics as gaming the system. It’s certainly possible to pass beyond optimizing into the shady territory of trying to hide income and assets.
“I lose my patience with people who are affluent — and they want to hide that affluence? Come on,” Stack says.
While it’s up to the individual to decide which legal financial aid optimization tactics are appropriate, reputable college financial planners see no problem in making a financial plan that maximizes the chance of getting aid.
“You’re just following the rules,” Orsolini says “It’s no different from putting money in a 401(k) to minimize your tax burden.”