How you can maximize financial aid for college

Q. I’ve heard that you should start planning for financial aid so you can move money around early and position it right. What moves should I make? My oldest is in 9th grade.
— Planning ahead

A. You’re right that starting early is a smart move.

But calculating projected financial aid for college is complex, and there are many misconceptions about the process.

The main thing parents should remember is to assume nothing, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

“Just because your neighbor’s or your colleague’s child received aid doesn’t mean you will or won’t receive aid yourself,” he said. “Financial aid is based on a combination of factors, and differs from school to school, even child to child.”

While there is no secret formula that will magically make dollars appear to pay for tuition, there are a few strategies you can employ early on to help increase your chances of qualifying for financial aid.

First, if your child has any money saved in his/her own name, such as a savings account or an investment UGMA/UTMA account, consider moving it into a parent-owned 529 plan instead, DeFelice said.

“The federal government expects students to use over a third of their own money to pay for education costs when determining aid, however, only 5.64 percent of assets held in the parents’ names are expected to be used towards college costs,” DeFelice said.

When it comes to the parents’ assets, the 5.64 percent weighting is taken from things like cash savings, investment accounts, and investment real estate – but not from retirement accounts, DeFelice said.

“In the years leading up to college, it might make sense to use excess cash savings to make additional mortgage payments, pay down consumer debt like credit card or auto loan balances, and max out your 401(k) or even make non-deductible IRA contributions if your income is too high,” he said.

If there is a need in the near future for any big-ticket purchases such as a new car, buy it before it comes time to apply for financial aid, DeFelice said.

“Now this is not to suggest going hog-wild on a spending spree right before college starts is the right thing to do – you still need to keep your emergency fund intact,” he said. “But a little creativity moving money around can go a long way.”

Many people like to set up 529 accounts for their grandchildren, but when it comes to financial aid this can actually hurt your chances of qualifying.

DeFelice said while grandparent-owned 529 plans do not get counted in the parents’ assets calculation, money coming out of the plan to pay for college is considered a gift to the student.

“This will be viewed as untaxed income for your child for financial aid purposes, and can impact the student’s aid eligibility by up to 50 percent of the distribution in the following year,” he said. “If grandma and grandpa want to help pay for college, they are better off gifting the parents money, which can then be deposited into a parent-owned 529 plan.”

DeFelice said in the years leading up to college, try avoiding things that will increase your income, which is a major factor in contributing to the financial aid calculation. Avoid liquidating any investments that will throw off large capital gains, and don’t take any retirement account distributions.

Having more than one child in college at the same time also increases your chances of receiving financial aid.

“However, if you are not lucky enough to have multiple tuition bills arriving in overlapping years, consider enrolling in some higher education courses yourself, and do it at the same time your student is applying for college,” he said. “You may receive more aid for the both of you.”

Then be sure to submit your FAFSA form as early as possible.

Check with your state as each one has their own student aid deadlines – but don’t wait until the last minute to file, DeFelice said.

“Financial aid administrators distribute funds on a first-come-first-served basis – and when the money runs out so does your chances of receiving any,” he said.

And don’t go by estimated income numbers in the years you apply for financial aid. File your taxes first so you are working with real adjusted gross income and tax liability numbers, he said.

“You don’t want to risk being declined by over-stating your actual income,” he said.