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Posted: October 24, 2012

How to maximize college financial aid

Try these steps

Wayne Farlow

If you would like for your child or grandchild to receive college financial aid, there are several steps that can be taken to help maximize both the probability of receiving financial aid and the amount received. Here are a few dos and don’ts for helping your child or grandchild maximize their financial aid.

The most important year for financial aid maximization is the year (starting on January 1st) when your child is a high school junior.  In that year, you will want to minimize your income, if possible. A simple rule of thumb is that for every $10,000 reduction in the total amount of a parent’s income, a child, who is considered for financial aid, will likely receive an additional $3,000 in aid.

If income is variable from year to year, minimize income and maximize deductible expenses in the year in which your child is a junior in high school. By lowering your net income, you will greatly increase both the chances of getting financial aid and the amount of aid that your child may receive.

Not all family members’ assets are considered equal by college federal aid standards. A child’s income and assets can cut their aid by 20 percent of each dollar saved or earned. If you were planning on giving your child $20,000 in a UGMA (uniform Gifts to Minors Act) account to help pay for college expenses, put the $20,000 into a 529 college savings plan. Funds held in a 529 plan will reduce financial aid by only 5.64 percent instead of 20 percent.

If your child is applying for financial aid, they should minimize their annual income to $6,130. In 2012, any income that is earned above $6,130 will reduce your child’s financial aid award by 50 percent of the additional income earned. If your child would have received $5,000 in financial aid, but earns $10,000 during the year, the aid received will likely be cut from $5,000 to approximately $3,000

Assets held by parents, including 529 college savings plans that were funded by the parents, reduce a student’s eligibility for financial aid by 5.64 percent. A 529 plan owned by someone other than the child’s parents, such as their grandparents, does not automatically reduce a child’s financial aid. However, every dollar from the grandparent’s plan that is used in paying for the child’s education will reduce the following year’s financial aid by 50 percent.

If your child is receiving financial aid and their grandparents have funded a 529 plan with your child as the beneficiary, the best strategy is to use other financial resources to pay for your child’s college expenses until they reach their senior year of college. Since their senior year is the last year in which they will receive financial aid, the grandparent’s 529 college savings funds can be fully used in your child’s senior year to pay for all of their educational expenses. Another strategy is for the grandparents to transfer ownership of their 529 plan to the parents. With this approach, only 5.64 percent of the plan’s assets will be used to reduce their grandchild’s financial aid.

Even if you think that your current income is too high to receive financial aid, it may be worthwhile to fill out the FAFSA financial aid application forms. In 2011, families earning over $100,000 received average grants and scholarships worth almost $5,500. If you do not fill out the FAFSA forms, your child may be disqualified from even receiving merit based scholarships.

Student loan debt now exceeds total credit card debt in the US. Student loans can follow the debtor for the rest of their lives. It is important that parents and grandparents begin saving as soon as possible, to help their children and grandchildren pay for college. By starting early, the income and growth from your college savings will hopefully provide for most, if not all, of the expenses required for your child to finish college debt free.

Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm.  He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning.  His book, “Financial Abundance Guide,” is available free at www.farlowfinancial.com .  He can be reached at wayne@farlowfinancial.com or at 303-554-0309.

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