Want your student to get help paying for college? Get smart about your strategy for acing the FAFSA.
Most U.S. colleges and universities, including state schools, use the Free Application for Federal Student Aid to calculate your “expected family contribution,” or the amount they think a family can afford to pay for tuition, room and board, books, and other college-related costs.
The gap between a school’s sticker price and the expected family contribution is the amount of need-based aid a student is eligible to receive. That help might come in the form of government grants, school-supplied grants, work-study jobs, or loans.
Families need to fill out the FAFSA for every year of study. Because it’s based on financial information that’s two years old, it pays to start strategizing while your student is still in high school. But even if you didn’t start plotting early, there are still last-minute moves you can make that will help you maximize financial aid.
Here are seven ways to get ensure you’re getting as much money as possible from the FAFSA:
1. Fill out the financial aid application
Some families don’t fill out the FAFSA at all, and that’s a big mistake, says Jason Anderson, a college and student loan planner in Overland Park, KS. Even if you don’t qualify for grants, which don’t need to be repaid, filling out the FAFSA lets you access low-cost student loans. Without it, you may miss out on state scholarship programs, too.
“Virtually every student that fills out that FAFSA will get some help paying for college,” Anderson continues. “The families who choose not to fill it out really end up getting dinged.”
2. Keep taxable student income around $7,000
For the 2022 school year — which considers 2020 income — a student can earn and keep $7,040 outside of the aid formula. Half of every dollar above that line counts toward the expected family contribution, and therefore lowers your aid eligibility. At $15 an hour, a student would need to work 40 hours a week for nearly 12 weeks at a summer job to earn that much money.
If your student earns beyond that protected amount, it’s not the worst move you could make. But think about it this way: Work beyond that $7,040 is essentially compensated at half the stated hourly rate, because every dollar earned reduces your aid eligibility by 50 cents. Choose work shifts with that information in mind.
3. Minimize student assets
The FAFSA also looks at student assets, calculating that 20% of a student’s savings and investments will go toward the expected family contribution. Assets in an UTMA or UGMA account, bank accounts and non-retirement investment accounts are all fair game.
The takeaway? It makes sense to spend down those student accounts. If a student has substantial assets or benefits from an UTMA or UGMA account, consider using that money to pay for expenses before college. Private school tuition, a car, lessons, a musical instrument, orthodontic braces, or travel that has an educational purpose are all ways to spend down an account. Plan to conclude that draw-down by the end of the student’s sophomore year of high school, so that it doesn’t appear on the FAFSA application for the first year of college.
If you have more time to plan, consider starting a 529 plan, which counts as a parental asset, rather than an UTMA or UGMA. And if your student has extra money sitting in a savings or checking account, consider opening a custodial Roth IRA. As a retirement account, its contents are protected from the FAFSA formula.
4. Postpone parental income
The formula “gives you a living allowance based on taxes and household size, and then 22% to 47% of your adjusted income after that is fair game,” says Mark Struthers, a financial advisor in Chanhassen, MN.
The exact amount depends on a complicated calculation that considers the parents’ ages, number of children and other factors.
“As a very rough ballpark, you’ll pay 20% to 25% of gross income toward college expenses if your annual family income is between $150,000 and $200,000,” Struthers says.
That drops to about 5% for families earning around $50,000 and 10% for families earning about $75,000.
If you can, postpone parental income. Parents who work a standard 9-to-5 job without bonuses or stock options may not have many ways to do that. Parents with more flexible situations may have more choices. If you have stock options, don’t exercise them during the year that the aid application will reflect. Ask if bonuses can be deferred. If you own a business, accelerate expenses and delay sending out invoices.
5. Don’t report assets that the FAFSA doesn’t measure
The FAFSA does not consider the value of a family’s primary residence or retirement savings. Sometimes people list them anyway, Anderson says. This is a mistake.
“It can make you look much wealthier than you are,” he says — and that could mean less financial aid.
6. Minimize parental assets that are measured
The FAFSA counts up to 5.64% of non-protected parental assets toward the expected family contribution. Non-protected assets include savings and checking accounts, cash, the net worth of any business with more than 100 full-time employees, a farm that is not the primary family residence, investment accounts, vacation or investment properties, 529 accounts, and tax credits.
You probably need some of the money you’ve stashed in the bank to pay your bills, including college costs. Plus, you should aim to keep an emergency cushion of between three and six months of household expenses. Reduce any account balances that are in excess of what you need by paying off (or down) student loans, car loans and credit cards before you submit the FAFSA.
If you pay down a mortgage, you’ll need to weigh whether to pay down the mortgage on your primary home or on a second home (if you have one). The play that maximizes financial aid is to pay down the mortgage on your primary residence. The FAFSA doesn’t consider equity in a family home, but it does take a bite of equity in vacation and investment properties.
At the same time, interest rates on owner-occupied properties are near historic lows, and rates are usually higher for vacation and investment properties. You’d save more money on debt repayment by paying down a higher-rate loan on your beach house or rented condominium. A financial planner can help you figure out whether you should make financial aid a priority or simply pay down the more expensive debt.
If you don’t have debts to pay down, you can shift your savings into protected assets by maximizing HSA contributions to pay for future medical bills (you can contribute up to $7,200 a year for a family in 2021), or contributing to a Roth or other retirement account.
You can also use savings to pay for home improvements and repairs, make estimated tax payments (you’re always free to pay the IRS ahead of the quarterly schedule), or make any large charitable contributions you’re considering.
7. Plan how you’ll spend money in a 529 plan
A parent-owned 529 plan counts as a parental asset. In some families, grandparents own a 529 plan and list a grandchild as the beneficiary. That asset doesn’t appear on the FAFSA, but when money comes out of the 529 plan to pay for college expenses, that withdrawal counts as income to the student. (If you’ve been taking notes, you’ll remember that student income counts more heavily against aid than parental income.)
To get around this issue, don’t tap the grandparent-owned 529 until the student’s junior year of college if you can afford to hold off. Because the FAFSA depends on a two-year-old financial snapshot, it won’t see the 529 withdrawal.