January 5, 2016 By Mark Kantrowitz
File the FAFSA to Get More Money in College
The Free Application for Federal Student Aid, or FAFSA, is your gateway to money for college from the federal and state governments and most colleges and universities. How you file the FAFSA may affect how much money you get and the types of financial aid.
Top Ten FAFSA Tips to Maximize Your Eligibility
1. File the FAFSA early.
The earlier, the better. You may have heard the standard song and dance about filing the FAFSA as soon as possible on or after January 1 to avoid missing deadlines for state and college aid. (Starting with the 2017-2018 FAFSA, the FAFSA start date will move up by three months to October 1.) Ten states award grants on a first-come, first-served basis and about a dozen have deadlines in February or early March. Colleges can also have early deadlines and even some federal student aid may run out if you apply late. But, did you know that students who file the FAFSA earlier may qualify for more aid? Students who file the FAFSA in January, February, or March tend to get more than twice as much grant aid, on average, as students who file the FAFSA later. So, file the FAFSA in January to maximize your aid eligibility.
2. Minimize income in the base year.
The FAFSA calculates the family’s financial strength using income and tax information from a previous calendar year called the base year. Since the financial aid formula is heavily weighted toward income, it is a good idea to minimize income during the base year. For example, avoid realizing capital gains during the base year. If you must sell stocks, bonds, mutual funds and other investments, try to offset the capital gains with losses. In fact, you can reduce your adjusted gross income (AGI) by having capital losses exceed capital gains by up to $3,000. You should also avoid taking retirement plan distributions during the base year, since the withdrawals will count as income on the FAFSA, even if they are a tax-free return of contributions to a Roth IRA.
Every $10,000 reduction in parent income will increase aid eligibility by about $3,000.
Every $10,000 reduction in student income will increase aid eligibility by about $5,000.
3. Reduce reportable assets.
Although assets don’t count as much as income on the FAFSA, they may still affect eligibility for need-based financial aid. You can make money in the bank disappear by using it to pay down unsecured consumer debt, such as credit cards and auto loans. Not only does paying off high-interest debt with low-interest savings make good financial planning sense, but it will also help you qualify for more financial aid. Paying off the mortgage on the family home works on the FAFSA but may not work as well on other financial aid forms, since the FAFSA ignores the net worth of the family’s principal place of residence while other financial aid forms do not.
4. Save strategically.
Money in the student’s name is assessed at a flat 20%, while money in the parent’s name is assessed at a lower rate, no more than 5.64%. So, it is best to save money in the parent’s name, not the student’s name. Luckily, money in a 529 college savings plan is treated as though it were a parent asset, regardless of whether it is owned by the student (a custodial 529 plan) or the parent. Now, while a grandparent-owned 529 plan (as well as 529 plans that are owned by anybody other than the student or the student’s custodial parent) is not reported as an asset on the FAFSA, distributions count as untaxed income to the student on the subsequent year’s FAFSA. This can reduce aid eligibility by up to half of the distribution amount.
Every $10,000 in student assets reduces aid eligibility by $2,000. Every $10,000 in parent assets reduces aid eligibility by up to $564. Every $10,000 in a 529 plan that is owned by the student’s grandparent, aunt, uncle or anybody other that the student and the student’s custodial parent will reduce aid eligibility by as much as $5,000.
5. Spend strategically.
If you happen to have saved in the child’s name, say in an UGMA or UTMA, fix the situation by either rolling it into a 529 plan owned by the student or parent or by changing the account owner. You can also spend down the student’s money to zero first, before touching the parent’s money, so that it won’t stick around to hurt aid eligibility in a second year.
6. Coordinate 529 college savings plans with the American Opportunity Tax Credit (AOTC).
If the family is eligible for the AOTC, they should carve out up to $4,000 in tuition and textbook expenses to be paid for with cash or loans to maximize the AOTC. IRS rules prevent double-dipping, so you can’t use the same qualified higher education expenses to justify both a tax-free distribution from a 529 plan and the tax credit.
7. Maximize the number of children in college at the same time.
The federal financial aid formula divides the parent contribution portion of the expected family contribution (EFC) by the number of children in college. Increasing the number of children in college from one to two is almost like dividing the parent income in half. So, something as simple as having more children in college can have a very big impact on the amount of financial aid available to each child. It may be too late to space the children closer together, but the impact on aid eligibility can be a consideration when deciding whether to allow a child to skip a grade. This is another reason why it is important to file the FAFSA every year, even if you got no grants last year, since small changes can have a big impact.
8. Even wealthy students may get some aid.
Financial aid is based on financial need, which is the difference between the college’s cost of attendance (COA) and the expected family contribution (EFC). So, there are two ways to increase financial need and therefore increase financial aid. One is to file the FAFSA in a way that minimizes the EFC. The other, however, is to increase the COA. Wealthier students may qualify for aid at higher-cost colleges or when multiple children are enrolled in college at the same time. Unless a student’s parents earn more than $350,000 a year, have more than $1 million in reportable net assets, have only one child in college and that child is enrolled at an in-state public college, they should still file the FAFSA.
9. The FAFSA is a prerequisite for low-cost federal education loans.
To qualify for the unsubsidized Federal Stafford Loan and Federal PLUS Loan, the student must file the FAFSA first, even though these loans are available without regard to financial need. Even wealthy students may qualify for these loans.
10. Seek out generous and low-cost colleges.
There are about six dozen generous colleges, including the Ivy League, that have adopted “no loans” financial aid policies. These colleges replace loans with grants in the student’s need-based financial aid package. Also, in-state public colleges may be your least expensive option, even after subtracting gift aid like grants and scholarships.
Now that you know how to file the FAFSA to get more money in college, make sure you avoid these ten common errors when completing the FAFSA.
For more information on the FAFSA, check out “What’s the FAFSA and why is it important?”
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