Some financial planning professionals offer college planning services to help families “evaluate and maximize” financial aid eligibility.
The process starts with the advisor collecting information about family income and assets and running a basic EFC calculation which is used to measure “financial need.” After that first step, some advisors will counsel families to “reposition” assets (and sometimes income) in order to increase eligibility for college financial aid.
Be very careful.
This advice is often very expensive and it is usually not effective.
- It is sometimes possible to reposition family assets or income in a way that results in a lower calculated FAFSA EFC or IM Family Contribution.
- A lower EFC/Family Contribution will sometimes (but not always) increase your “calculated financial need” which in theory increases your eligibility for need-based financial aid.
- BUT – increasing your eligibility for need-based financial aid does not automatically increase the amount of grant and scholarship that you are actually awarded. In fact – much more often than not – additional eligibility for need-based financial aid will NOT result bigger discounts (i.e. more grants and scholarships) from the schools the student is eventually admitted to.
- Most advisors use published financial aid statistics to impute the amount of additional financial aid awarded they estimate will be awarded as a result a reduced EFC. Unfortunately, these published financial aid statistics (collected via Common Data Set) are very misleading and widely misunderstood. The use of these statistics to project increases in financial aid awards is a big problem and will almost always result in an overestimate additional aid awarded!
- “Repositioning” advice tends to be very expensive. In addition to charging high consulting fees, many advisors recommend shifting traditional assets into annuities and other financial instruments that have very high fees. You should be very skeptical of this kind of advice. At the very least, we recommend that you seek a second opinion from a financial professional who doesn’t promote themselves as a “college planning specialist.”
More Eligibility Does Not Always Result in More Discounts
This key point is very important and worth repeating.
There is a very big difference between increasing overall eligibility for need-based aid and increasing the amount of actual grants and scholarships that you will receive from colleges!
Run Actual Net Price Simulations
Instead of relying on an oversimplified approach that is based on published financial aid statistics such as “% of need met,” use the Net Price Calculator (NPC) for each target school to run before and after Net Price calculations to see if a particular repositioning strategy produces a lower estimated Net Price.
This is more work but it is much more accurate way of estimating the impact of repositioning strategies.
That said, always make sure to read the fine print associated with each school NPC so that you understand the possible limitations of the estimates.
Low Cost Repositioning Tips Worth Exploring
Review Eligibility for Educational Tax Credits
Educational tax credits reduce the cost of college just like grants and scholarships. You just receive them later in the process. Think of them as rebates that you receive when you file your tax return each year instead of discounts that you receive up front.
If your federal Adjusted Gross Income (AGI) is under $180,000 (married filing jointly) or $90,000 (if you file as single, head of household or qualifying widow/er), you may qualify for education tax credits that save your family up to $10,000 in the first four years of college.
So, if your income is just above the cutoff you might want to consider increasing your pretax contributions to retirement. Consult a tax professional and discuss your options.
Consider Shifting Student Assets to Parent Assets
Student assets are assessed at 20% – 25% by the financial aid formulas and parent assets are only assessed at approximately 5%, it makes sense to shift assets from the student to parents where possible.
If the student assets are held in UGMA/UTMA custodial accounts that were established by the parents, ask your financial advisor about the possibility of transferring them to a 529 college savings plan where the parent is still the owner and the student the beneficiary.
Or, you can simply use student assets to pay for standard expenses such as summer camps, tutoring, test prep courses, college visits and other normal student expenses – while setting aside a similar amount in a parent account dedicated to paying for college.
Business assets are assessed at a lower rate than typical real estate assets. So, if you own rental property that is not part of an LLC or Partnership, you should consult with your tax advisor to see if it makes sense to make a change.
Strengthening your academic record is the most effective way to increase your discounts and reduce the net price at many colleges. Many colleges award their scholarships bsed on GPA and/or standardized test scores.
- Work hard in high school and maintain the highest possible GPA in the most rigorous classes you can handle.
- Prepare properly for the SAT and ACT.
- Apply to colleges that are more likely to provide merit discounts to students with academic credentials similar to yours.