It's the time of year when millions of Americans hunch miserably over government forms, painstakingly filling in little boxes with the details of their family finances. No, we're not talking about taxes -- it's that unhappy season when parents fill out financial aid forms for college. Many colleges, especially private schools, require aid applications to be handed in by the spring.
If you're in the midst of this joyless process now, good luck -- it's probably too late to do much to make things easier. But if, on the other hand, you anticipate applying for aid in the next year or two, financial planners say there are a few steps you can take now that could help increase your family's eligibility for aid.
Don't Rule Out Expensive Schools
To cover your bases, make sure your child applies to several colleges. "They're going to have more of a shopping venue to compare and contrast and possibly even appeal financial aid," says Peter Laurenzo, certified financial planner and president of College Aid Planning Associates in Albany, N.Y., who's written a book on college financial aid. "When kids come in and apply to one school, they're at the mercy of the school."
Students should also apply to schools in varying price ranges, he says. "Based on their need, it is not uncommon for a student to attend a $35,000
a year school for the same price or less than a $20,000 school. The $20,000 school may give the student $5,000 of financial aid, and parents have to pay $15,000, while the $35,000 school may give the student $20,000 in aid, and the parents have to pay $10,000."
Spending Down Your Child's Savings
In another strategy to bolster aid eligibility, your child could spend some of his or her savings on items considered necessary for college, such as a computer or even a car, before you file for financial aid. "In a way it's hiding the money, but it's a real expense of college, and families are paying for it," says Stephen Joyce, director of student aid at Bowdoin College.
Be aware that plan can backfire if families abuse it, making lavish purchases at the same time they claim to need aid. Financial aid officers, especially at private colleges, have a tendency to ask nosy questions. "If families are running around in very late-model expensive cars, if they're claiming poverty, you might say, where did the money come from for the Volvo?" says Joyce. "Do you really need a Volvo? Could it have been a Metro?"
On the subject of spending, some parents mistakenly believe that being in debt will benefit them when it comes time to apply for aid. "They think it will help them with financial aid, when in fact, it just puts them in negative cash flow," says Laurenzo. On a related note, he says, don't get a bigger mortgage aiming to increase your debt and make yourself appear more needy. It will cost you more than you'll gain.
Paying Off Debt
However, if you're applying for non-federal aid, financial planners say there is a way you can both pay down existing debt and reduce your home equity, thus increasing your eligibility for financial help. The strategy: You pay off your outstanding consumer debt using a home equity loan. Not only do you reduce the equity in your home (which has the effect of decreasing your assets for aid purposes), but also you'll get rid of debt.
It works like this: Say your house is worth $100,000 and you have a $20,000 mortgage, leaving you with $80,000 equity in your house. Between your car loan and credit card, you owe another $20,000. So, you take out a $20,000 home equity loan from the bank and pay off your car loan and credit card debt. "Now the equity in your house is $60,000 instead of $80,000, so you've got $20,000 less equity" that aid offices will count as an asset, explains Laurenzo. Plus, you probably have a tax deduction you wouldn't have had before, since in most cases the interest on home equity loans is tax deductible. Interest on consumer debt isn't.
Families can also take advantage of extra cash or short-term investments to pay down debt, advises Dean Knepper, a certified financial planner and CPA with Lifetime Financial Planning in Leesburg, Va. "Those assets will count against aid eligibility. But if
families use that money and pay off consumer debt, it increases their eligibility for aid."
Shifting Assets Out of Your Child's Name
Another strategy to increase your eligibility involves shifting assets from your child's name (where the money was presumably being taxed at a low rate) into your own name shortly before you apply for aid. This makes sense because financial aid offices are allowed to tap a greater portion of a child's assets, up to 35% in a year, to pay for college. By comparison, aid offices can draw on only 5% or 6% of the parents' assets in a single year, depending on the school. "I don't think we'd have any objection" to shifting assets, says Bowdoin's Joyce, "if for tax reasons they were trying to shelter
money early on and down the road they put it back into their own name."
Be aware, though, that one common kind of college savings vehicle, known as a Uniform Gift to Minors Account, or UGMA, can't be taken back by the donor. Once given, the gift remains the property of the child.
A variation on the shifting assets strategy is to move a savings account from the name of a child now applying to college into the name of a younger sibling. By doing this, you immediately reduce the savings of the child headed for college, thus increasing his eligibility for aid. You also ensure that the money will continue to be taxed at the lowest possible rate, since it's still in a child's name. But don't think financial aid offices won't find out. The questionnaire used by many private colleges asks if a family has assets in other children's names, so you'd be legally obliged to reveal the existence of the account.
Also, aid officers caution that any movement of assets must take place before a parent fills out the financial aid form. "If they do it after they fill out the form, they really have given us incorrect information," says Susan Dickey, assistant to the director of financial aid at the University of Illinois. If that happens, the college could investigate, demanding copies of accounts with dates. "It doesn't happen often, but it could be done," she says.
To make things easier for yourself and avoid having to shift assets at all, consider doing the bulk of your saving through a 529 college savings plan. 529s are considered the property of the donor, not the beneficiary (so they don't even allow for the possibility of shifting money into a child's name). As the owner of a 529, you wouldn't need to worry about being taxed at a higher rate than your child, because starting this year, the federal government has made withdrawals from the accounts tax-free. Note, however, that aid offices will consider distributions of earnings from a 529.
Last Resort: Appealing Your Aid Award
Finally, if you receive financial aid and it falls short of your expectations, consider appealing it, says Richard Black, assistant vice chancellor for admissions and enrollment at the University of California (Berkeley). Occasionally, the staffers who calculate government aid screw up the numbers that parents have filled in. Read the form that explains how the aid analysis was done, and if you see a mistake, alert the school and send the form back to be recalculated.
You may also have legitimate reasons to appeal an aid award if your family's financial circumstances have changed since you filed for aid. Consider appealing if you or your spouse have lost a job or are getting a divorce, or if a sibling of the original applicant for aid has unexpectedly decided to go to school, too.
And though it may be a long shot, you can always try to play aid offers off each other. If one of your child's choices for college has made a generous offer of aid, see if the other schools will match it.