Q: "How should I structure my finances so that my child receives the maximum amount of aid? When should this process start?"
A: Eligibility for need-based financial aid is based on the difference between the college’s cost of attendance and the expected family contribution (EFC). The EFC is a measure of the family’s financial strength and is based on the income and assets of the student and parents, the household size, the number of children in college at the same time and the age of the older parent.
The need analysis formulas are heavily weighted toward income. Most strategies that involve sheltering assets will not have much of an impact on the EFC. For example, cash in a bank savings account counts against you, while the formula ignores consumer debt such as credit card debt and auto loans.
Using money from the savings account to pay off credit card debt makes the money disappear, potentially reducing the EFC and increasing eligibility for need-based aid. But while paying off high interest debt with low interest savings may make a lot of sense from a personal finance point of view, the potential impact on the EFC is minimal.
Many parent assets are sheltered by the need analysis formula. The net worth of the family home (but not a second home) is ignored, as is money in qualified retirement plans, life insurance policies and any small businesses owned and controlled by the family.
There is also an age-based asset protection allowance that shelters a portion of other assets. For most parents of college students, with a median age of 48, this shelters about $50,000 in parent assets. In certain circumstances assets can be disregarded entirely. The remaining assets are assessed on a bracketed scale with a top rate of 5.64%.
So in a worst-case scenario, each $10,000 in parent assets will reduce eligibility for need-based financial aid by $564. Less than 4% of dependent children have any contribution from parent assets. If the parent assets are high enough to make a difference, usually the parent income is sufficient to eliminate aid eligibility on its own without the consideration of assets.