‘Paying for College Without Going Broke’

“You might think that the families who receive the most aid would be the families with the most need. In fact, this not necessarily true. The people who receive the most aid are the people who best understand the aid process.”

If your accountant showed you a legal way for you to save $4,000 on your income taxes this year, would you do it?

The parallels between the two are interesting. Both have loopholes that regularly get exploited by the people who know about them. But more important, both also involve adversarial relationships. In the case of your taxes, the IRS wants as much money from you as it can get. You, in turn, want to give the IRA as little as possible. This is a time-honored tradition, a system of checks and balances that everyone understands and accepts. If everyone sticks to the rules, the system works as well as anyone can expect.

In the case of the colleges FAO, it is his job to get as much money from you as he can. In pursuit of this task, he will be much more invasive than the IRS ever is, demanding not just your financial data but intimate details of your personal life such as medical problems and marital status. He wants to protect the college’s assets and give away as little money as possible. Let him do his job, believe me he is good at it. But in the meantime, you have to do your job – and your job is to use the rules of financial aid to make your contributions to college as small as possible.

Parents who understand these rules get the maximum amount of financial aid they are entitled to under the law. No more, and no less.

It is not in the College Financial Aid Officer’s best interest for you to understand the aid process. The more you know about it, the more aid they will have to give you form the school’s own coffers.

Unlike the tax code, where everyone believes that the rich are the only ones able to take advantage, the financial aid strategy if for everyone. Whether you are just getting by or are reasonable well off, you still want to maximize your aid eligibility.

Depending on which survey you read, between 70% and 80% of all college-bound high school students were accepted by their first-choice college last year. Nowadays, the problem is not so much how to get into college, but how to pay for it once you are there.

At the minimum you need to fill out the FAFSA (Free Application for Federal Student Aid). Many private colleges require the CSS/Financial Aid PROFILE (FAP) form as well. Two methodologies are used: Federal and Institutional. These are filled out to determine the following: parent’s available income, parent’s available assets, student’s available income and student’s available assets. This will determine your Estimated Family Contribution (EFC).

The total cost of a year at college includes the following (COA)

  • Tuition and Fees
  • Room and board
  • Personal expenses
  • Books and supplies
  • Travel

The difference between what you can afford (EFC) to pay and the total cost of college is called your “need.”

Aid is made up of the following:

Grants and Scholarships

The best kind of aid, because they don’t have to be paid back, some from the federal government and some from the state. It is almost always tax-free.

Federal Work-Study (FWS)

The federal government subsidizes this program, which provides part-time jobs for students.

Student Loans

These loans usually taken out by the student not the parents, are often subsidized by (and guaranteed) by the state or federal governments. The rates are usually lower than regular unsecured loans. In most cases, no interest is charged while the student is in school, and no repayment is required until the student has graduated or left college.

TIPS FOR REDUCING YOUR EFC (Expected Family Contribution)

  1. If the IRS permits, there can be advantages to filling out the short forms (1040A or 1040 EZ).
  2. Move your bonus into a non-base income year
  3. If you had a unusually good year, explain to colleges what happened
  4. If you have significant un-reimbursed employee expenses, try to become an independent contractor to deduct on schedule C of the 1040
  5. If possible, avoid cashing in US Savings Bonds during base income year, unless you’ve been paying taxes on the interest each year as it accrued
  6. During base income years, do not report younger children’s interest income on the parents’ tax return. File a separate return for each child.
  7. During base income years, avoid large amounts of margin debt
  8. If you itemize your deductions, avoid large state & local tax refunds
  9. Setting up a legitimate business on the side will enable you to deduct legitimate business expenses, and may reduce your AGI
  10. If possible, avoid large capital gains during base income years
  11. Try to avoid IRA distributions during base income years
  12. Concentrate your federal income taxes into base income year to lower your EFC
  13. Convert debts that are not counted by the aid formula into types that are
  14. If you were going to buy soon, buy now and use cash
  15. Use cash in the bank to pay off credit card debt. Will reduce assets and increase eligibility for aid
  16. Use cash in bank to pay off tax bills to reduce your assets
  17. Make your contributions to retirement provisions as early in the year as possible
  18. If you can, try to load up your contributions to retirement vehicles in the years prior to base income years
  19. Take out a home equity loan to pay for college and/or consolidate debt not taken into account in the aid formula
  20. Use margin loan to pay for college and reduce the appearance of your assets
  21. a. For student who hopes to receive aid from a school using only the Fed Methodology, it doesn’t make sense to have income higher than $2,620 b. For a student who hopes to receive aid from a school using the institutional methodology, it doesn’t make sense to have income higher than $2,490 (2,815 for upperclassmen)
  22. If you think you will qualify for aid, do not put assets in your child’s name

Student Income

They can earn $2,620 before being penalized. After that the income will be assessed at 50% and it will be counted as an asset that will be assessed at 35%. This means, that for every dollar over $2,620 that they make it will cost them .85 cents in aid. This is for the Federal Methodology.

For the Institutional Methodology the income freshman minimum contribution is $1,150 ($1,400 as upperclassman) and there is no $2,420 protection allowance.

It seems bizarre, but for financial aid purposes you want your child to limit the amount they make. Once they reach the limit they would be better off spending their time studying.

The Federal work-study program (FWS) that is funded by Uncle Sam doesn’t work this way. WFS, while subject to income tax, are excluded from the financial aid formulas and will not decrease your aid. If available, these should always be used.