For those of you with college-age kids or kids who will soon be in college, one of the annual rights of passage is the completion of the Federal government’s “FASFA” (Free Application for Federal Student Aid) form. For many, this form should be completed as early in February as possible.
The information on the FASFA is used by college financial aid offices to determine how much the expected contribution towards annual college costs should be from the family (parents and child(ren)) and how much should come in the form of scholarships, grants and loans. This information is presented in snapshot format — it measures all assets and debts as of the date that it is completed.
Even if you don’t expect to qualify for much aid, the FAFSA process is necessary to be eligible for Stafford Loans (for the student) or PLUS loans (for the parents.)
Mark Kantrowitz, the publisher of Fastweb and FinAid, recently made a presentation to financial advisors about some of the techniques that parents could use to lower the “expected family contribution” (EFC) towards college costs from parents. His talk included these strategies:
- Minimize income. Parents should work to minimize their income during the base year (the year before their oldest child goes to college) and the other years that they have children in college. This can be done by deferring income (perhaps into your employer retirement plan) or avoiding taxable distributions from retirement plan and using capital losses to offset taxable capital gains where possible.
- Actively reduce reportable assets. The FASFA form looks at the parent’s income, savings, taxable investments, trust assets, 529 or Coverdell Education savings accounts and value of any business holdings. It also asks for the total savings of the student. It does not look at the value of the parent’s home, the assets in retirement accounts or their debt. Because of this, parents who want to minimize their EFC should use assets in savings or other taxable investment accounts to pay down loans, credit card balances or mortgages and lines of credit before completing FASFA. They should also work to maximize their retirement plan contributions for those years. Finally, it is better to save in the parent’s name and not the name of their child because a much smaller percentage of the parent’s assets are counted towards the EFC than the child’s assets.
- Spend down assets smartly. Parents should spend down the assets of the child (buy buying computers for college or other supplies for the child) before they file the FASFA. This will lower the expected contribution rate of the child.
- Maximize student overlap. The EFC for a family is reduced if more than one child is in college. This is the one case where it pays to have triplets.
For more information on FASFA, see the fastweb website at this link: http://www.fastweb.com/content/fafsa
- How are you saving for college expenses?
- What has your experience been like dealing with financial aid offices?
~ Allyn Hughes CFP®, ChFC®, CLU® — Brooks, Hughes & Jones – Partners in Wealth Management – Tacoma, WA