Student debt can last a lifetime, so it’s critical that students and parents take every (legal) advantage of the system.
The real, inflation-adjusted cost of college has more than doubled since 1980. What’s also changed is the nature of financial aid. It’s much harder, for example, to be declared “independent” from your parents in order to qualify for more help. Loans (which have to be repaid) have replaced grants (which don’t) as the primary form of college financial aid. And many colleges that were once need-blind — accepting students regardless of their financial situation — are now paying closer attention to the bottom line by being “need aware” — that is, being more willing to admit a student the more he or she can pay.
How are parents and students supposed to navigate this tricky world, without winding up deeply in hock? There are ways to increase your chances of financial aid, but first here are some basics you need to know:
Schools expect parents to help. Federal and private aid formulas are largely based on the parents’ income and assets. If the parents are divorced, the financial aid package typically will be based on the income and assets of the custodial parent. If the custodial parent remarries, the stepparent’s income and assets will be considered as well. A student won’t get more aid if parents refuse to contribute.
Parents with high incomes who expect their children to pay for all or most of their schooling are putting those kids at a real disadvantage, since the aid package reflects the parents’ assumed ability to pay rather than their actual contributions. For more information (including how hard it is to be declared independent or self-supporting as a student these days), read “What can you do if your parents refuse to help” and “Deadbeat parents who won’t help pay for college.”
Income matters more than assets. People often worry that saving for college will make it harder to get aid, but the reality is that if you can save, you probably should. Financial aid formulas expect those with moderate and high incomes will have had more opportunities to save than those with lower incomes — whether or not they actually have saved. The higher your income, then, the less aid you should expect, no matter how you deploy your assets. If your income is more than $150,000 and you have only one child in college at a time, don’t expect much, if any, need-based help from any but the priciest universities.
Financial aid policies differ enormously. Most colleges base their financial aid packages on the Free Application for Federal Student Aid. Some use an additional form, the College Scholarship Service (CSS) Profile, which asks deeper and more detailed questions about the family’s finances.
What you actually get from the schools, though, will vary depending on a number of factors. Some schools have big endowments; others don’t. Some “gap” their students, which means they don’t provide enough aid to meet the students’ entire need. Some rely heavily on loans, others on grants that don’t have to be paid back. Some use “merit” (non-need) scholarships to attract good candidates; others don’t. While you should use a calculator to figure out your Expected Family Contribution (like this one at FinAid.org), the number you get is just a starting point for what you might actually be asked to pay. You also should use the net price calculator found on every college’s website to get a better idea of what the school might actually cost you. You can use the calculators to try out different scenarios, such as using savings to pay off debt, to see if it will move the needle on your EFC.
I’ve included some strategies below that are designed to do just that. You should know, however, that reducing your EFC doesn’t automatically mean you’ll get more grants or scholarships.
“People who think ‘I’m going to get more free money’ may be deluding themselves,” warns Lynn O’Shaughnessy, the author of “The College Solution” and a blog that goes by the same name. “It’s not necessarily true. You might just get more loans.”
With those warnings and caveats, here are some strategies that can help you get more financial aid:
1. Be first in line. To boost your chances of both need- and merit-based aid, apply early, advises Deborah Fox, the founder of Fox College Funding, a San Diego company that advises parents on financial aid strategies. If you wait until the “priority deadline,” which actually means the application deadline, the merit aid may be long gone and the needy “might just get loans,” Fox warns. You may need to get your financial aid and application forms into the school as early as mid-November. Each school has different deadlines, so call and ask, Fox says.
By the way, even if you don’t expect need-based aid, you have to submit a Free Application for Federal Student Aid, or FAFSA, to be eligible for federal student loans. Federal student loans have fixed rates, numerous repayment options and the possibility of forgiveness. The amounts undergraduates can borrow are limited, which can prevent them from getting over their head in debt. Private student loans have variable rates, are often more expensive and have far fewer consumer protections. Private student loans are kind of like paying for college with credit cards, except unlike credit cards, student loans typically can’t be erased i2. Find a generous school. The most powerful way to reduce college costs is to find a school that’s committed to helping students in need, O’Shaughnessy says. You can start your research at CollegeBoard by typing a school’s name into the “College Search” box on the home page. You’ll see not only the school’s costs but also the percentage of student need the college meets and the average size of financial aid packages. In Los Angeles, for example, Loyola Marymount University’s $39,125 sticker price is $5,338 less than the University of Southern California’s. Loyola Marymount, however, meets only 72% of its students’ financial need, while USC meets 100%. The average USC financial aid package is nearly $12,000 more. “Parents focus on the sticker price, and that’s meaningless,” Fox says. O’Shaughnessy agrees. “Find the schools that meet the best percentage of need that your kid can get into,” she advises.n bankruptcy. Bottom line: Stick to federal student loans.
3. Find a school that wants your kid. Another wild card in the financial aid game is how much the school needs your child to meet its own goals, whether it’s for a smarter student body or a better volleyball team. Schools often offer merit aid to attract the students they want, and merit aid typically continues for the student’s entire stint at the college. The first step in positioning your student is to start with academics, Fox advises. Look for schools where your child’s SAT scores put him in the top 25% of the freshman class. You can find these numbers at the National Center for Education Statistics’ College Navigator (the figure you want to exceed is the one for the 75th percentile). Then look for schools that are trying to diversify — by geography, ethnicity, gender, major or skills.
“We found out that Duke was looking for female engineering students one year,” Fox says. “That was worth $15,000 a year (in merit aid).” One way to find out who’s considered desirable is to attend college fairs or seek out local representatives of the school and ask, Fox says.
4. Spend custodial accounts and other student-owned assets. Uniform Gift to Minors Act and Uniform Transfer to Minors Act accounts are considered to be the student’s assets, and they will count heavily against your child in financial aid calculations. Again, the parents’ income matters most, but you may be able to reduce your EFC by spending these accounts before you fill out financial aid forms. You can’t use the money to pay for “basic support” such as housing, food or clothing, Fox warns, but you can use it for non-support purchases such as a computer, or to reimburse yourself for the cost of private school or tutors.
5. Save in a 529 college savings plan or other parent-owned account. Parent-owned assets get more favorable treatment in financial aid formulas, and 529s offer a tax-free way to save. But don’t think you can hide money by having Grandma and Grandpa own the 529 account. It’s true that you don’t have to report 529 assets owned by a non-parent on the FAFSA, but any withdrawal from the 529 to pay college expenses has to be reported the following year and is typically considered student income, which can heavily affect the student’s eligibility for aid. A better strategy if grandparents have opened a 529, O’Shaughnessy says, is to have them hang on to the money until the final year in college, when spending it won’t affect the financial aid package since the student won’t be applying for any more aid.
6. Max out your retirement contributions. You probably should be doing so anyway if you want a decent retirement, but financial aid formulas give you an added incentive. Retirement accounts — either yours or your kid’s — aren’t counted at all when figuring your EFC. Don’t make the mistake, which some people do, of including qualified retirement accounts such as IRAs, Roths, 401k’s and 403b’s on the FAFSA.
However . . .
7. Don’t tap your retirement funds to pay for college. Premature withdrawals are rarely a good idea, since you’ll probably need that money later to fund your retirement. You may be able to dodge taxes and penalties, because withdrawals of contributions from a Roth IRA are tax- and penalty-free, and withdrawals from traditional IRAs incur taxes but avoid penalties if used for college. However, distributions from retirement accounts count as income, which could hurt your financial aid eligibility the following year. If you really must tap retirement funds, consider a loan from a 401k or 403b rather than a withdrawal. For more on retirement accounts and financial aid, visit FinAid.org.
8. Have more than one person in college at a time. Your EFC typically will be reduced, sometimes dramatically, if you have more than one student in college at a time. If your kids are close in age, it can make sense to have the older one put off starting for a year or so to maximize the number of years they’ll be attending college simultaneously. Of course, if there’s a big gap in their ages, this strategy isn’t practical. “Nobody tells you about this when you’re having children,” O’Shaughnessy notes wryly. “People say, ‘I should have had them closer together!’ ” Another option is to have a parent return to school full time to pursue a degree, but colleges are aware there’s a lot of fraud in this area, so expect more scrutiny, says Mark Kantrowitz, the publisher of the FinAid.org and FastWeb sites.
9. Have the child move in with the poorer parent. As noted above, typically the income and assets of the custodial parent’s household are what are used to determine financial aid packages. Say one parent is a teacher and the other a doctor. If the child spends more than six months of the year with the teacher, that’s the household on which aid would be based. The federal financial aid formula “won’t even know the other parent is a doctor,” O’Shaughnessy says. Some schools, however, use an additional form — the CSS Noncustodial Profile — that takes into account the resources of the other parent. You can find a list of schools that use this form here. Finally, if you’re divorced and the custodial parent, you probably don’t want to get remarried right before your kid applies for financial aid. Holding off on the nuptials will keep your fiancé’s assets and income from being included.
10. Use assets — don’t hide them. There’s a breed of self-described college specialists who encourage parents to buy annuities and other expensive life insurance products to hide assets, O’Shaughnessy says. Sometimes they encourage parents to borrow against home equity to make these purchases, which pay the salesperson hefty commissions. Real financial planners, however, discourage clients from buying insurance they don’t need. Hiding home equity is usually pointless anyway — most colleges don’t count home equity, and those that do often ask about annuities as well. For more, read “Is it OK to hide home equity?” A better strategy is to use any savings that could be counted against you to pay off debt, such as credit card balances and auto loans. For schools that don’t count home equity, using savings to pay down a mortgage can be another effective way to boost potential aid.
One last bit of advice: Don’t commit fraud. The strategies above are perfectly legal, even if some are based on loopholes that don’t make a lot of sense. “Congress is involved” in creating the FAFSA formula, O’Shaughnessy notes. “Need I say more?”
Other strategies — like doctoring the tax returns you submit with the FAFSA, or failing to include non-retirement assets or hiding income — aren’t legal. Besides being bad karma, committing fraud can extract a big penalty if it’s discovered: Your kid could get kicked out of school.