Parents of sophomores need to know that their students’ college financial aid awards will be calculated on the base year that starts January 1 of the student’s sophomore year. This means that the fall semester of the student’s sophomore year will be the last chance parents have to implement some financial aid strategies that could significantly increase their student’s eligibility for need-based financial aid.
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Spending time learning about financial aid strategies now will probably pay bigger dividends than time spent convincing your student to sign up for just one more AP class so that she’ll get that full-ride scholarship.
There’s plenty of resources for understanding financial aid and how it will apply to your family’s unique situation. I’m listing five of the most commonly provided financial aid strategies that can have a major impact on financial aid if implemented in a timely fashion.
1. Move the assets out of the student’s name.
Or as Gen and Kelly Tanabe put it “Parents should keep their children poor.” This is because the FAFSA assesses money in the student’s name at 20% while parent’s assets are assessed only a 5.65%. If students have UMGA funds, they shouldn’t by the start of their spring semester. The one exception to this rule is a college savings plan. College saving plans such as 529 plans are assessed at the same rate as the parents.
2. Explain to interested relatives the best way to contribute to paying for the student’s education.
Some grandparents have 529 Plans in their name that they intend to use to help pay for the their grandchildren’s education. Unfortunately, since the plan is not in the student’s or parent’s name, the dispersion will count as income which will reduce financial aid eligibility. Probably not the intent the grandparents were looking for.
If the grandparents don’t want to put the accounts in the parent’s or student’s name, they should consider waiting until after January 1 of student’s sophomore college year to make any withdrawals. This way, it won’t affect their financial aid. Of course, if the student isn’t going to qualify for financial aid, this isn’t an issue.
3. Move the student of divorced parents.
Students whose parents are divorced should live with the parent that will increase their financial aid eligibility. This doesn’t mean that the student has to live with the parent who has legal custody. The FAFSA defines custody as the parent whom the student lived with for the majority of the year from the date when the FAFSA is signed. It does not require non-custodial parent information.
Before parents make any moving plans, they need to realize that the FAFSA does include the custodial parent’s current spouse’s income and assets in calculating financial aid. Furthermore, schools that require the PROFILE for financial aid, may also require the non-custodial parent to submit a separate form for any financial aid award.
4. Avoid selling a house during the base year and while the student is in college.
You can look up the details but as someone who ended up selling a house during this period, I think all you need to know is just. don’t. do. it. Of course, there will be times when it’s unavoidable but relying on financial aid officers to understand that the money is needed as a down payment for the next house is a risky business.
5. Avoid home equity loans.
As far as the FAFSA is concerned, any unspent part of the home equity loan is a cash asset that has to be reported. Also, a home equity loan won’t increase your financial aid eligibility by reducing the amount of home equity because home equityis NOT reported on the FAFSA. However, it is reported on the PROFILE.
Even if the previous five financial aid strategies don’t apply to your specific situation, hopefully you realize that it’s a good idea to get up to speed on financial aid sooner rather than later. For those with students taking AP’s to get into the right school, this means that you should also be learning the differences between the FAFSA and PROFILE. Many of the most competitive colleges require students to submit the PROFILE as part of their financial aid application.
As important as understanding how the FAFSA and base year works when applying for financial aid, you’re likely to reap even bigger benefits by selecting the right schools to apply to in the first place. Some colleges are more generous with financial aid than others. Learning how to identify the colleges most likely to be generous with financial aid for your family’s situation can often cut the cost of college more than shuffling your financial assets.
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