Posted On October 13, 2010 by PUSC
By Margaret Opsata
Margaret Opsata is a contributing editor at Dow Jones Investment Advisor Magazine. In the January issue of Spirit, she will look at portfolio diversification.
There are millions of dollars out there that could help provide financial aid to your children when they go to college — if you know how to play the game.
Sending children to college is one of the most expensive investments that most people ever make. It ranks up there with buying a home and saving for retirement. However, though about $37 billion of financial aid is available annually, a fair amount of it goes to folks whom no one would ever call needy, such as families with incomes of $100,000 and up. To tap into this gold mine, parents must understand the current rules of the game.
Many people think that the student’s senior year in high school is when most college decisions are made. Actually, the most crucial time from a financial standpoint is the calendar year that starts on January 1 of the youngster’s junior year. “That’s when the so-called base year begins, which is the year that the financial aid people care about,” says Peter Laurenzo, a certified financial planner who heads College Aid Planning Associates in Albany, New York, and is the author of College Financial Aid: How to Get Your Fair Share (Hudson Financial Press).
During the base year, families fill out the Free Application for Federal Student Aid, usually abbreviated as FAFSA, which the U.S. Department of Education uses to calculate how much a family can afford to pay toward college costs the following year. This amount is known as the Expected Family Contribution or EFC. The 1999 FAFSA deadline is May 3, but the form should be completed as soon after January 1 as possible to maximize your chances for aid.
FAFSA contains a number of suprising provisions. For instance, it discourages savings in the child’s name because the government assumes that thirty-five percent of the child’s assets will be spent on college, compared to only six percent of assets that are held in a parent’s name. Many families are confused because their financial advisors have encouraged them to save in the child’s name because, after youngsters reach age fourteen, their earnings are usually taxed at a lower rate than their parents’. (The 35:6 ratio was under scrutiny by Congress and may have been modified by the time this article appears.) Otherwise, parents of college-bound children will want to weight the tax advantages against the financial aid consequences.Other provisions of FAFSA
offer some creative planning opportunities. “For instance, equity in primary residence, annuities, and cash-value life insurance are not counted in the formula, so it might make sense to pay down your mortgage or buy more life insurance before your base year begins,” says Jeff Adelstone, a certified financial planner with Adelstone Financial Services in Tucson.
This might be the time for a parent to go back to college because the expected Family Contribution per student is reduced when more than one family member attends college at the same time.
Self-employed people also stand to benefit because FAFSA discounts business assets by forty to sixty percent. “This could be the year when you finally launch that business you have been dreaming of starting,” Andelstore suggests.
It might also be the time for a parent to fulfill a lifelong dream of going to college or earning an advanced degree because the EFC per student is reduced when more than one family member attends college at the same time. “If you take six semester hours, which usually means two courses, or if you are a fifty-percent-of-full-time student, you could count as an additional student in the family,” Adelstone says.
Even if a family does nothing to lower its expected contribution, the EFC is almost never as large as the actual cost of attending a four-year American college today. There usually is a financial gap that has to be filled. Parents can borrow the difference at market rates, of course, assuming that their credit is good, but the better approach is to find out how much financial aid is available from the college that has accepted the student.
To answer this question, most school ask parents to fill out a College Scholarship Services Profile that uses data from the base year to provide a snapshot of the family’s finances. The college then puts together a financial-
“If your child has straight A’s and is active in student government, while my child has a C average and no activities, most colleges will be more creative with your financial-aid package than with mine.”
aid package for the youngster, using a combination of scholarships, grants, work-study opportunities, and loans, both subsidized and unsubsidized. “The higher the percentage of scholarships and grants in the package the better, because these do not have to be repaid,” notes Richard Lewis, a chartered financial consultant who heads R.W. Lewis & Associates in St. Louis and is the author of How To Pay for a College Education Without Going Broke (Bob Adams Inc.). “Next best are work-study offers and subsidized loans that charge lower interest.”
Parents sometimes assume that two schools with similar tuition and living costs will offer similar financial-aid packages, but this is not always the case. “Some schools have a history of better endowments,” Laurenzo points out.
The size and composition of the financial-aid package also can vary according to how badly the school wants a particular student. “If your child has straight As , is active in student government, and has earned a letter in a sport, while my child has a C average and no extracurricular activities, most colleges will be more creative with your financial-aid package than with mine,” says Lewis. John Lind, vice-president for enrollment management at Southwestern University in Georgetown, Texas, tends to agree. “These days, many schools, including ours, are awarding financial aid less on the basis of need and more on the basis not merit,” he says.
As a result, students with strong academic credentials, a good record of community service, and/or interpersonal skills that colleges prize may be able to improve upon the financial aid they are first offered, even if they come from affluent families. “If you go back to the financial-aid officer and say, ‘My child would really like to attend your school, but this other school has offered us a better package,’ the college you want may readjust its numbes and come up with a more favorable offer for you,” Laurenzo says.
Note: The information in this article is intended to be general in nature. Talk with an accountant or financial advisor about the best strategies for your situation.
Students who meet one of six conditions are awarded financial aid without regard to their parents’ financial situation:
“When the only information that has to be submitted is about the student’s own finances, the youngster is likely to qualify for a much better aid package,” says Jeff Adelstone of Adelstone Financial Services.
No one would advocate marriage or pregnancy as a way of obtaining more financial aid, but some families may want to consider the military-service option, particularly when a child is uncertain about a career path or is not especially interested in higher education right now.
Another way to cut costs is to complete the first two years at a community college, where tuition is low and the student can save money by living at home. “No one ever asks where you started school as long as you eventually earn the degree you want,” notes Richard Lewis of R.W. Lewis & Associates.
The Internet is chock-full of ideas and information about college financing choices. Good places to begin are College Board Online and the Financial Aid Information Page.