This link has been bookmarked by 51 people . It was first bookmarked on 08 Aug 2006, by Mike Penta.
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Unfortunately, need analysis formulas often do not reflect a family's ability to pay, and are little more than rationing systems. For example, the federal methodology ignores consumer debt, to the detriment of many families, making them look more affluent than they really are.
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why should a parent who conscientiously saves for her children's college education but makes the mistake of saving the money in her child's name get less aid than a parent who saves the money in her own name?
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Save money in the parent's name, not the child's name. Or use a savings vehicle that is treated like a parent asset, such as a 529 college savings plan
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Pay off consumer debt
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Parents should go back to school to further their own education at the same time as their children
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This strategy is not as effective as it once was, as whether the parents count is now an item subject to professional judgment review. The school will want to see documentation that the parent is genuinely pursuing a degree, since this is prone to fraud. Many schools will merely reduce income by the amount the family spends for the parent's education, instead of increasing the number in college figure
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Spend down the student's assets and income first
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Accelerate necessary expenses, to reduce available cash
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Maximize contributions to your retirement fund
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Ask grandparents to wait until the grandchild graduates before giving them money to help with their education
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A section 529 college savings plan owned by a parent has minimal impact on financial aid, and one owned by a grandparent has no impact on financial aid
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Choose the date to submit the FAFSA carefully, as assets and student marital status are specified as of the application date
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base year refers to the tax year prior to the award year, where the award year is the academic year for which aid is requested. For example, if the student who is applying for financial aid will matriculate in September 2012, the base year is the calendar year from January 1 through December 31, 2011. The need analysis process uses financial information from the base year to estimate the expected family contribution
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Likewise, the value of assets are determined at the time of application and may have no relation to their value during the award year
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Converting included assets into nonincluded assets will increase eligibility by sheltering them from the need analysis process.
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If you estimate your income on the Free Application for Federal Student Aid (FAFSA), don't overestimate. Families have a natural tendency to overstate income, in part by reporting gross income (before deductions for health insurance premiums) instead of adjusted gross income. Using too high an income figure can have a significant impact on your expected family contribution. If possible, do your taxes early, so you can use the correct figures instead of estimating.
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Be careful when reporting the amount of taxes paid. Many people confuse the amount of withholding (the figure from the W2s) with the amount of taxes paid. Don't make this mistake.
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- If the family runs its own business, they can reduce the salaries of family members during the base year. (This will only have an effect if the family business is a C corporation. S corporations, partnerships and sole proprietorships will pass through their income to the owners.) The income retained by the corporation will still be considered as a business or investment asset, but assets are treated more favorably than income. Also, assets can be disregarded if the family qualifies for the simplified needs test.
- Making a larger contribution to retirement funds.
Note that making a larger contribution to the parents' retirement funds doesn't normally affect eligibility for financial aid, because the contribution gets counted in the formula as untaxed income. It only works in this case because the Simplified Needs Test depends on the AGI and not the total income or total available income.
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Avoid consumer debt, such as high credit card balances and car loans. Consumer debt isn't counted in the need analysis formula, so there's no benefit to having a credit card balance. Paying off your credit card balances and auto loans will reduce your available cash, thereby increasing your eligibility for financial aid.
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The only kind of debt that counts in the need analysis process is that which is secured by property.
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The Federal need analysis methodology does not consider the equity in the family's primary residence. So to maximize your eligibility for Federal aid, you could use your cash and other included assets to prepay part of your mortgage. Many private colleges and universities, however, do count your home as an asset when allocating institutional funds.
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Although these low-interest loans do represent financial assistance, many families only consider grants and scholarships that don't need to be repaid to be true financial aid. Don't be misled into thinking than a decrease in the EFC will mean that somebody else pays.
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Note that having a parent go back to school to finish their education is no longer as effective in improving aid eligibility, because parents are no longer included in the number in college figures. Congress changed the formula because there was a lot of abuse (e.g., parents with PhDs or MDs registering at a community college to get their associate's degree, but not actually attending classes or even paying the tuition bill).
If you are a parent who is legitimately going back to school to finish your education or pick up an additional degree, provide documentation of this to the school's financial aid administrator and ask for a professional judgment review.
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If the student's parents are divorced or separated, the custodial parent is responsible for filling out the financial aid form. The custodial parent is the parent with whom the student lived the most during the past year. This is not necessarily the same as the parent who provided more than half the student's support or who claimed the student as a dependent on their tax return. It does not even have to be the parent who has legal custody of the child.
This has many consequences for the aid application. For example, a student could arrange to have the parent with the lower income and assets be their custodial parent simply by living with them.
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If the custodial parent remarries, the new spouse's finances will be considered by the need analysis formula.
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Apply for private sector scholarships. Although receiving outside scholarships will often result in a compensating decrease in the need-based financial aid package, some schools will reduce loans before touching the need-based grants. For example, MIT uses 40% of an outside scholarship to reduce the self-help level and the rest is used to reduce the institutional grant.
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Pursue college-controlled merit scholarships. Although an Ivy-League school won't award you a full-tuition scholarship for academic, artistic, or athletic talent, some of the less prestigious institutions may offer you such aid in order to entice you into enrolling.
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As noted previously, the custodial versions of 529 college savings plans, prepaid tuition plans and Coverdell education savings accounts are disregarded on the FAFSA if the student is a dependent student. Such plans will also be disregarded if the account owner is someone other than the student or parent, such as a grandparent, aunt or uncle.
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Before worrying about shifting assets, first determine who owns the asset. For example, a bank CD in the parents' name "in trust for" the child's name is generally a parent asset. The test to use is to identify who is responsible for paying taxes on the asset's earnings. For example, if the parent receives a 1099 that reported the earnings on the parent's social security number, the asset is owned by the parent. Likewise, if the earnings were reported on the child's social security number, even if the parent files taxes on behalf of the child, the asset is owned by the child.
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Trust funds are generally ineffective at sheltering assets. Moreover, if the fund is set up to prevent the trustees from spending the principal, it can harm the student's eligibility for financial aid. The school will assess the entire trust as if it were a student asset, regardless of any restrictions on the principal. Since the student can't spend down the principal, the trust will represent an annual drain on the student's finances by increasing the student contribution
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This page presents a list of strategies for maximizing your eligibility for need-based student financial aid.
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- If any of these conditions are not true, then the accounts are still reported as an asset. For example:
- Regular custodial accounts, such as UGMA/UTMA bank accounts, are reported as an asset of the student.
- If the student is an independent student, the custodial versions of 529 College Savings Plans, Prepaid Tuition Plans, and Coverdell Education Savings Accounts are reported as an asset of the student.
- If the student is dependent, but the 529 college Savings Plan, Prepaid Tuition Plan or Coverdell Education Savings Account is not a custodial account, the account is reported as a parent asset.
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Most need analysis formulas shelter $35,000 to $60,000 of the parents' assets, depending on the age of the older parent. For most families of college-age children the asset protection allowance (APA) will be around $45,000 to $50,000. (The median age of parents with college-age children is 48. The asset protection allowance for a family with two parents where the older parent is 48 years old is $47,700 using 2006-2007 need analysis tables. The amount fluctuates up and down from year to year, depending on complex factors involving the consumer price index.) As a result, only about 10% of families have any contribution from the parent assets. Even when parent assets exceed this threshold, they have a negligible impact on the family's expected family contribution. A $10,000 decrease in parent assets, for example, will yield only about a 560 decrease in the EFC. (Also, the Federal Methodology's Simplified Needs Test will ignore assets altogether when the parents' income is less than $50,000 and all family members are eligible to file an IRS Form 1040A or 1040EZ or aren't required to file an income tax return.) Thus parent assets do not have as much of an impact as is normally assumed by most parents.
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Spend the student's assets before you touch any of the parent's assets. Since the student's assets are "taxed" at a much higher rate in the need analysis formula than the parents, why let them be taxed a second time during the next year? If possible, spend the student's savings to zero during the first year.
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