This post is part 1 of a 2-part series. To read part 2, which talks about what to do about the money your child has sitting around in his or her name before you fill out the FAFSA, click here.
If you’re parenting a 12th grader or a current college student, one of the most important days in your family financial life is coming up on October 1st, 2016.
Why is this date so important?
This is the first day you’ll be allowed to fill out the Free Application for Federal Student Aid (FAFSA).
Every family of a 12th grader or a current college student should fill out the FAFSA, even if you think that your son isn’t going to college, even if you believe that your income is far too high for you to get any aid to help you pay for college. Your son could change his mind in the next year, and as far as your income – did you know that you can make up to $200,000 per year and have substantial assets and still get free money financial aid to help pay for college? Besides that, if your child does end up needing any loans for college, the FAFSA form is the one and only gateway to the best, lowest interest federally subsidized student loans.
Don’t pass up free money that your daughter might have coming to her.
The only way to find out whether you might qualify for free money to pay for college is to fill out the FAFSA form.
The FAFSA form uses a confidential process to gather information about your family’s income and assets since January 1st of your child’s sophomore year of high school. It then uses that information to determine how much it is believed that your family can probably afford to pay for college.
Let me be blunt about what I’m about to say next. Parent, it will help if you can appear as poor and needy as possible on the day you fill out that FAFSA form.
This week, use these 7 last minute strategies to help tip the FAFSA equation in your favor.
You can’t impact how much of your income is going to show on this FAFSA form. That’s water under the bridge now. But you do still have time to tweak your assets and how they will appear on your FAFSA form.
Below are 7 strategies you can use right now to reduce the assets you put on your FAFSA form, potentially increasing the free money your child will get to help pay for college.
As you consider using the strategies below, do two things: First, be sure to preserve an emergency fund as a safety net just in case you encounter unexpected expenses over the next three to six months. Second, I strongly suggest that you consult a certified financial planner or other qualified investment advisor, show him or her this post, and get professional help applying the following strategies to your family’s particular individual situation. If you’re looking for a financial advisor who knows a lot about college financial planning, I suggest Mike Branch.
If you can’t get in to see a financial planner right away, that’s OK. Submitting a FAFSA form before October 21st is still considered “getting it in early.”
1. Make a careful accounting of every dollar you currently have in your name.
Include a listing of every dollar your 12th grader has in his name too. Write down a list of all the balances you currently have in savings accounts, checking accounts, money market accounts, brokerage accounts, certificates of deposit, stocks, bonds, other securities, mutual funds, commodities, and elsewhere, and then consider strategically moving (or, as financial planners like to say, “repositioning”) some of that money before you have to report it on FAFSA.
2. Consider using your extra cash to pay down your high interest consumer debt.
If you use your extra cash to pay down your car loans, credit cards, and even your home mortgage, it won’t be visible on your FAFSA form.
3. Think about squirreling extra cash away in your retirement accounts, or in your son’s Roth IRA.
This is a brilliant idea, since every penny in retirement accounts is hidden safely away from the prying eyes of every financial aid application process. Ask your financial planner whether this might be a good choice for you at this time.
4. Pay in advance for a needed home remodel.
If you genuinely need a new roof or more energy-efficient windows, or a necessary appliance such a more energy-efficient furnace, air conditioner, or refrigerator, now’s the time to buy it. Why? Because the FAFSA doesn’t ask you to reveal anything about the value of the home you live in or the value of anything inside it.
5. Use your extra cash to buy more advertising or build a new warehouse for your family business that has 100 or fewer employees.
Or put extra money into the farm that you and your family live on. Why? Because the FAFSA won’t ask you to reveal the value of these things either.
6. Make all your usual monthly purchases right before you fill out the FAFSA.
Pay all your usual monthly bills, and as you do pay as much extra on your high interest car loans and credit cards as you possibly can.
If you don’t have car loans or credit cards, go to the store and get the largest haul of groceries you ever have in your life, and spend a whole Saturday preparing meals for your freezer. Make an extra payment (or more) on your home mortgage if possible. Do whatever you can to reduce the available cash sitting around in your savings accounts, checking accounts, money market accounts, brokerage accounts, certificates of deposit, stocks, bonds, other securities, mutual funds, commodities, and other accounts. Just be sure, as I said above, that you preserve an emergency fund for yourself as you do so.
7. Be sure that if you’re going to buy anything, you don’t rely on credit to do so.
Your objective will be to drain your cash down, not incur more debt for your family. Having additional family debt does not help you in any way in any financial aid calculation process.
Moving the money around in this way can accomplish two things. First, it keeps this money from sitting around in parent or student accounts where it will be noticed as a wealth asset in financial aid calculation processes, and second (in the case of paying down the parent’s consumer debt and home mortgage), it can free parents financially so that they are in a better position to help students with college costs when the time comes.
“What about trust funds? Do they count as family assets in the financial aid application process?”
The answer is yes. Trust funds are included in financial aid calculations. Trust funds must be reported on financial aid application forms, even if those funds are not currently available to either the parents or the child. When it comes to the FAFSA form, if only interest or principal will be available, then the trust officer should calculate the present value and report that.
“We don’t have any extra cash. Are there any “repositioning” ideas that don’t involve spending?”
There are three additional strategies I can think of that don’t involve spending any money.
- If you own a family business, set aside time to look carefully at your company’s human resources. Does your company currently have 101 full-time employees? If so, you may decide to quickly offer one employee early retirement, bringing your total number of full-time employees down to just 100. Why? Because if a family business has 101 full-time employees or more, the assets of that business will be included in certain financial aid calculations. Family businesses with only 100 full-time employees or fewer, however, are excluded from those financial aid calculations — even if they bring in $1 million a year in profits.
- If your child has substantial assets such as an UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfers to Minors Act) account in his name, his assets could take a direct hit when need-based financial aid is calculated. Ask your financial advisor if it might be a good idea for you to purposely drain down these UGMA and UTMA accounts before filling out the FAFSA form. It’s not possible to simply cash out an UGMA or UTMA account or transfer ownership of it to another person, so don’t try that, but since the law says that the money in an UGMA or UTMA account “must be used for the benefit of the beneficiary,” it’s possible to transfer those funds into a 529 college savings plan where the child is named as beneficiary. This works well, because 529 college savings accounts are scrutinized at a lower “parent” rate and so have minimal impact on financial aid eligibility.
- Before filling out the FAFSA form, check to see how much money your son has in accounts in his name. (I’m not talking about 529 plans where your son is named as beneficiary — those are safe — I’m talking about other types of accounts.) Here’s why. On the day you fill out the FAFSA form, the financial aid calculation process is going to look at all the money in your son’s name (not including 529 plans), and automatically reduce his need-based financial aid by 20% of that amount. If your son has $10,000 in the bank in his own name on the day you fill out the FAFSA, his future financial aid award will automatically be reduced by $2,000. Oh no. Where can your son hide his money from prying eyes at this point? I explain that in part 2 of this series, which you can find here.
“My kid’s already in college. Do these strategies apply to our family too?”
You as a parent should fill out the FAFSA form again every October that you’ll have a child in college the following fall. The great news? If you can use the above strategies to increase your family’s financial need, you’ll be able to go to your daughter’s current financial aid office and say: “Our financial situation has changed. Can you find a way to give her more free money financial aid to help pay this year’s college bills?”
“Oh, my goodness. Is it really OK for us to strategize to this extent?”
As you read these strategies, do you find yourself huffing in disapproval that anyone would try to “play the system” by making their financial situation look dire on the FAFSA form?
Do you think that the most ethical thing is to have families make all their financial decisions blindly throughout this important time, be stunned and shocked at how little aid they’re qualified for, and then sign their children up for indentured servitude to student loan payments through age 50?
Let me be clear about this. The financial aid rules and policies in the United States are set up to reward families who take the steps I’ve outlined above. Wealthy families already know about these strategies; they have specialized lawyers and consultants and accountants to help them figure these things out. If we keep these strategies secret, we will only disadvantage the middle class and low income families who need them most.
Use the strategies. Your kid’s future financial life is at stake.
This post is an excerpt from my book LAUNCH: How to Get Your Kids Through College Debt Free and Into Jobs They Love Afterward (due out this month). To be among the first to purchase a copy of this book, subscribe to my free weekly email newsletter using the form above. Then click here to learn how to “whitelist” my newsletter with your email provider so it ends up in your primary email inbox every single week.
If divorce is a part of your family story, be sure to read the post about divorced parents and financial aid I’ve written here.
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What about you? What strategies have helped you get more free money financial aid for college? Comment below or LIKE Jeannie Burlowski Author on Facebook, find this post on that page, and let’s talk about it there.
Who is Jeannie Burlowski?
Jeannie is a full time author and speaker. Her writing helps parents set their kids up to graduate college debt free and move directly into careers they excel at and love. She also helps students apply to medical school at her website GetIntoMedSchool.com. You can follow her on Twitter @JBurlowski.