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You most likely qualify for financial aid.
Commonly, parents ask whether or not they should file the Free Application for Federal Student Aid (FAFSA) or CSS Profile, a form required by 400 private colleges. Of course, I know where this question comes from. There’s a misconception that there’s an income cut-off for FAFSA. When I ask them how much they earn, they tell me figures like $75,000, $100,000, $125,000, or as high as $250,000. But the reality is, many high-income earners, even those making as much as $400,000 per year, may qualify for financial aid. Many documented cases show a significant portion of college aid goes to the college’s top income earners.
Exactly how do high-income earners, those making six-figure or more – qualify for financial aid? This post goes into detail about three key strategies to ensure that you get considered for financial aid.
Apply for financial aid
Opting out of FAFSA is a mistake. The only exceptions might be if you only have one student, who is planning to attend a public in-state school, and your income is more than $300,000. Otherwise, you should fill out the FAFSA and let schools decide if they can give you aid after you appeal and ask for more funding. And even if free grants and scholarships are not provided, at the very least, you may qualify for low-interest loans and work-study.
If you spent little time learning about FAFSA and the CSS Profile because you never thought you’d qualify, here’s a quick lesson:
- FAFSA is an acronym that stands for the Free Application for Federal Student Aid, a free online application that students can submit to qualify for federal grants and loans and institutional scholarships, and state aid.
- FAFSA asks questions about dependency status, student and parent demographics, financial situation, schools attended, and applying to, for example.
- As long as you have the materials to answer these questions, the process can take approximately 20-30 minutes to fill out and submit.
- The CSS Profile is hosted by the College Board and is required by 400 colleges and universities. CSS is an acronym for College Scholarship Service. The form is quite long, has a fee, and gives colleges, typically those with larger endowments, a deeper look into your finances. Having to fill out the CSS Profile can indicate opportunities for more financial aid. Colleges with deeper pockets have more financial aid capacity and can consider your unique and extenuating circumstances that may affect your ability to pay for college.
Before you decide not to apply, you’ll need to check with your colleges to see if it is required. Many schools require the form for you to be considered for merit-based aid. And some states required the form for graduation (e.g. Texas and Illinois) or for state aid, such as New York, with the Excelsior Scholarship.
Shelter your assets
If you are a high-income earner, earning at least $100,000 or more, or you have saved money and built a nest egg for your family, you may be curious about how to minimize its impact on your student’s financial aid package. When you fill out the FAFSA, it gives a snapshot of your financial situation as of the date it was completed. Before you fill out your form, you may want to consider several strategies to shelter your assets.
Transfer reportable assets into assets you don’t have to report. According to the FAFSA, you must report the following assets—
- Bank accounts
- Brokerage accounts
- Money market accounts CDs
- Stocks, bonds, mutual funds
- 529 colleges savings plans
- Real estate
- Trust funds
- Other investments
If you have any of these assets, your move would be to transfer it into an asset that you do not have to report. Examples of assets that you do not have to report on FAFSA includes:
- Retirement accounts (e.g. Roth IRA, Traditional IRA, 401K, 403b, SEP, Keogh, etc.)
- Small business ownership
- Home equity
For example, rather than saving money in your 529 plan for your student, you may consider opening a custodial Roth IRA account and saving there instead (but your child won’t touch it until they retire or make a first home purchase). There are many possibilities, that a simple spreadsheet could help solve.
But you should know how assets impact your financial aid. When you fill out FAFSA, you are provided with your Expected Family Contribution (EFC). EFC is the amount FAFSA says you can pay for college. The impact an asset will influence your EFC depends on who owns it, you, or your student. If your student holds an investment, it can increase your EFC by 20% on the FAFSA and 25% on the CSS/Profile. When you, as the parent, own an asset in your name, it increases your EFC by only 5.64% on the FAFSA and 5% on the CSS/Profile.
Other things to know about how assets will impact your EFC:
- With its simplified needs test, the FAFSA will disregard assets if the parent or student (must be independent) earn less than $50,000, is a dislocated worker, and other criteria, making the EFC automatically zero.
- Also, FAFSA has an asset protection allowance, which shelters a portion of parents’ assets based on the older parent’s age. The maximum amount is $9,400, and this phased out this year. The CSS/Profile has something similar for education and emergency savings.
If you do proceed to transfer any of your assets, be sure to speak to an accountant. For example, if there are capital gains, this will be reported on next year’s tax return and will impact your FAFSA two years from now.
You should also consider other strategies to shelter assets while getting ahead fiscally. These include:
- Using savings to pay down debt. If you have cash savings that exceed your credit card debt, you may want to use this to pay down the debt and boost your EFC.
- Invest in a large purchase, such as home improvement projects, a car, computers and other equipment for your college student.
- Ask relatives to hold off on any large gifts for birthdays or graduation.
- Avoid any 529 plans in the grandparent’s name. Once funds are withdrawn, it becomes income for your student which will have a big impact on the EFC.
- For existing 529 plans, transfer from parent to student, if allowed. If not, look into transferring between siblings, to the one not applying for college and financial aid.
Be honest, but vigilant about getting financial aid.
As you think through how to shelter assets, you should do so honestly and with integrity. Within federal guidelines, you can only legally and ethically not report so much, without drawing a red flag to your FAFSA application. For example, if your tax returns show many interest payments, your assets don’t qualify the source. Often, your best bet is, to be honest about your situation.
The reality is that most people cannot afford the high costs of college and need financial aid. As such, it’s important to find solace in the fact that when you fill out financial aid forms and colleges review them, several factors may be at play that gives context to your financial situation, income, and assets: What are your living costs? Do you have other college-age kids? Has your 2020 circumstance changed from what your 2019 tax returns show? Are you recently divorced, widowed? Are you or a spouse been laid off?
The FAFSA and CSS Profile doesn’t always capture these changes. And colleges know this. Colleges offer financial aid to high-income earners for several reasons, to entice top students, to diversify their class with out-of-state or region students, or to hit enrollment and revenue goals (something we may see a lot of during the Covid-19 pandemic). Let’s get specific about what I have seen:
- A school may consider aid for an income, even if it exceeds $400,000 if the family lives in a major metropolitan area where the cost of living is higher and has multiple college-age kids. Multiple kids attending college will divide your income into parts.
- 2020 circumstances may be different from 2019 tax returns – perhaps there’s been a recent loss in income or divorce.
- Also, some schools don’t need a reason to give need-based aid. If it’s a private school, they can define need however they want.
What do I want you to take away from this post? You should apply for financial aid because it is likely that you do qualify for some sort of savings.
Conclusions + Next Steps
As some next steps, here’s what you should do to take action on getting more financial aid. First, spend time making sure you have filled out financial aid forms correctly and accurately. Make a spreadsheet of reportable vs. non-reportable assets and the amounts you’ve invested and saved. A common overreported asset are retirement accounts. Next, speak with your accountant about transferring assets that may reduce your EFC and any implications this may have on next year’s tax return. Also, consider paying down debt or making any big purchases to cut down on the amount of cash that will be considered in your EFC.
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