By: Investor Solutions, Inc.
In 2003, the U.S. Department of Education will provide more than $67 billion to help millions of students and families pay for post-secondary education. This figure equates to about 70 percent of all student aid. If you’re currently seeking practical alternatives to footing the college bill, you may first want to check out some of the financial aid options that might be available from Uncle Sam.
The two basic types of financial aid available for college education are Loan programs and Gift programs. Loan programs consist of money that you must repay or earn, this includes government-run work programs and student loans. Gift programs entail funds that must not be repaid; these programs include grants (usually based on need), scholarships (academic & athletic performance), and fellowships (merit). Our focus will be primarily on Federal Financial Aid (grants), and slightly touch upon credits available and financial aid directly from the school itself.
As a parent seeking financial aid for your dependent children, you will be asked to disclose all information concerning bank accounts, stocks, bonds, mutual funds, real estate, and the family business. The federal government’s program for financial aid is based on Financial Needs Analysis where they typically will look at income, assets, age, need for retirement income, dependents, number of family members in college, and other circumstances. These federal grants (Pell Grants) are available only to undergraduate students based on need. (Maximum $4,000 in 2002-2003)
The U.S. Department of Education uses a Standard Formula:
Cost of Attendance – Expected Family Contribution (EFC) = Financial Need
College costs can dig deep into a parent’s savings, and during a weak economy and rising unemployment many folks naturally rush back to upgrade their higher education. Then to make things even worse: Sixteen states have jacked up costs at public four-year colleges and universities by more than 10%, according to the National Center for Public Policy and Higher Education. At the same time, 17 states have decreased their total investment in student aid.
How can you improve your chances of receiving Financial Aid?
Financial planners are getting quite crafty by implementing some of the following legal strategies to better prepare parents for their chances to qualify for financial aid:
If using College Savings Plans (like 529 Plans or Education Savings Accounts-ESA), avoid using parents or children as account owners. If grandparents are the account owners the assets typically will not be considered when calculating financial aid.
Take Advantage of Retirement Accounts
Most schools do not include retirement savings when awarding financial aid, so utilizing your IRA, 401K, and Pension plans to maximize annual contributions will normally remove those funds from your considered assets.
Keep Assets out of the Child’s Name
Avoid placing assets in the name of children (Trust Accounts, UTMA, etc.). If you have funds in the child’s name, try to deplete the funds. They can legally be used for education-related expenses, such as a new computer or SAT prep courses.
Minimize all Earned & Unearned Income
Parents may try to defer employer income bonuses and avoid taking capital gains until later years, they also advise their children to keep student income to a minimum. You may want to postpone getting remarried, since the financial status of stepparents may also be considered in the formula.
Pay Down your Mortgage
In many financial-aid formulas, equity in your home or farm is not counted. Using extra money in your savings account to make extra payments toward your mortgage principal may help reduce your assets for financial-aid.
Investments in Annuities, Cash-Value life insurance & Collectibles
Investments in these types of financial products generally do not have to be reported on financial-aid applications. Wait until the college years are over, before you take cash distributions from these products or turn your collectibles into cash. (Be cautious investing in annuities and other insurance products, they may tie up your money for several years, and many impose severe surrender and early withdrawal penalties)
When assets are listed in the name of the child, many programs will expect that approximately 35% of these assets are available for college funding. This can dramatically affect your chances of receiving financial aid. Whereas, approximately only 6% of the assets listed in name of the parents are considered available for college funding.
A few months ago, I consulted with a client about college financial aid for their child that was recently admitted to an Ivy League school. The parents were considering some other investment alternates for their non-qualified annuities. To our surprise, the university did not consider parental owned annuities in the calculations of their financial aid formula. Although we generally do not recommend annuities as the most favorable investment choice, in some cases they may be a suitable investment for those looking at obtaining financial aid.
Two tax credits are also available to those funding higher education costs, the Hope Scholarship Credit and the Lifetime Learning Credit. The Hope Scholarship Credit can be used for qualified tuition & expenses during the first two years of education, the maximum credit is $1,500 (2003) and qualification is phased out at Adjusted Gross Income levels of $103,000-MFJ and $51,000-single (2003). The Lifetime Learning Credit can be used for most education related expenses except room, board, and books. It is available at both the graduate and undergraduate level, for 2003 the credit maximum is $2,000; it’s also subject to the same phase-outs as the Hope Scholarship Credit.
One drawback to the federal aid program is there are no allowances for differences in the cost of living across the country. For example, going to school in a big city like New York, will cost you more than going to a similar type of school in Georgia, but the aid program does not take this into consideration. Although the government aid program has many loopholes, many private schools and universities are getting wise to the flaws in the federal financial aid system and they have implemented stricter financial aid formulas in their private needs analysis that include the value of the primary residence and retirement accounts.
To some, restructuring your finances to maximize your chances of financial aid may seem a bit underhanded. Although none of the above mentioned strategies are illegal, they should not be abused as to “beat the system”. You should consult with your personal financial advisor on the best options that fit your particular financial situation.
To apply for Federal Financial Aid, you will need to submit a federal form FAFSA available on the U.S. Department of Education website at http://www.fafsa.ed.gov. The deadline for the 2003-2004 school year (July 1, 2003- June 30, 2004) is June 30, 2004.
 Wall Street Journal, March 12, 2003, College-More Families Hide Assets to Qualify for Financial