If you’re a parent, you’ve probably given some thought to how you can help your child afford to go to college. Many parents focus on building a solid college fund for their children, which is a great way to make school more affordable. But fewer parents think about how to maximize their child’s financial aid.
To receive federal financial aid, students must complete the Free Application for Federal Student Aid (FAFSA) every school year. The FAFSA uses financial information from both the student and their parents to determine each student’s expected family contribution (EFC). A higher EFC will mean your child qualifies for less financial aid, such as grants and federal student loans.
Fortunately, there are ways you can reduce your child’s EFC and ensure they get the most possible assistance.
1. Get started two years before your child will attend college
The FAFSA currently requires parent tax returns from two years prior to the year when the student will attend school. Let’s say that your child is filling out the FAFSA for the 2020 school year. They’d need your tax return from 2018, not 2019.
Assuming your child will be going to college right after high school, you’ll need to focus on reducing taxable income in their junior year. You’d also want to avoid unnecessary increases to your income until their junior year of college.
2. Pay more toward debt
If you have both substantial savings and any sort of debt, such as an auto loan or mortgage, then you should consider using your more of your savings to pay down your debt.
The government counts your assets towards your child’s EFC, so if you can reduce your savings this way, it’s beneficial from a financial aid perspective. Just make sure you keep enough saved for a suitable emergency fund.
3. Make expensive purchases before filing
You and your child should make any upcoming expensive purchases before filing the FAFSA. This obviously doesn’t mean you should go on a shopping spree, but it makes sense to pay for anything you know you will need, such as a laptop for school or a home repair. You’ll be spending the money anyway, so you might as well spend it before it can count against you.
4. Have the student transfer their savings to you
Although both student and parent assets count towards a student’s EFC, student assets are weighted more heavily. As of 2019, up to 20% of student assets count towards their EFC, compared to up to 5.64% of parent’s non retirement assets.
If your child has $10,000 in their bank account, they could cut their EFC by almost $1,500 by transferring that money to you.
5. Increase retirement fund contributions
It’s usually a smart financial strategy to contribute as much as you can to your retirement accounts, and this also helps when your child applies for financial aid.
Your retirement account contributions will reduce your taxable income and your child’s EFC. And retirement accounts are a good place to have your money, because the FAFSA does not consider them an asset.
6. Don’t withdraw from retirement accounts
Since withdrawals from many types of retirement accounts are considered taxable income, you should avoid taking out money during tax years that will apply towards your child’s financial aid. Any money that you withdraw and don’t spend will also be part of your assets.
If you need the money, you may want to consider a loan backed by your retirement account instead of a withdrawal.
7. Avoid capital gains
Capital gains will also boost your taxable income, so if you plan on selling any investments, it’s better to do that in a tax year that won’t affect your child’s financial aid. That being said, you should still always make the decision that you feel is best for your investment portfolio.
Losses, on the other hand, could help you in this regard by reducing your taxable income. If you have any investments that have decreased in value and that you want to sell anyway, it can also benefit your child.
A big difference in your child’s financial aid
All the tips above are legal ways to reduce your child’s EFC and increase the amount of financial aid they qualify for. Given how much college can cost, it’s well worth maxing out your child’s financial aid so that they won’t need to borrow as much in private student loans.