Positioning your finances to maximize financial aid

Photo: M. Connors for Morguefile

Q. My daughter is in 10th grade, and we’ve been saving for college for a long time. There’s money in a 529 Plan, an UTMA and she also has a savings account. We have our own 401(k) plans, IRAs and a brokerage account, plus money in an emergency fund. What’s the best way to position our money so she’s hopefully eligible for some financial aid?

A: Before embarking on a plan to position assets for financial aid, you need to look at your family finances the way the financial aid office will.

Schools will define your financial need as the Total Cost of Attendance (COA) minus your Expected Family Contribution (EFC), said Peter McKenna, a certified financial planner with Highland Financial Advisors in Riverdale. Then the federal government and the schools will determine how much of the financial need they are willing to cover with loans or grants.

The household’s assets impact the EFC formula, but the largest factor in the EFC is income, McKenna said.

“Between 22 and 47 percent of parental income is considered available to pay for college. Student income above $3,750 is counted at 50 percent,” he said. “This means that a family with $150,000 of income and no assets would be expected to contribute over $40,000 per year towards college ($150,000 x 27% = $40,000).”

What we think we can afford for college and the calculated EFC are usually vastly different, McKenna said. He recommends you try this tool from SavingForCollege.com, which will estimate your EFC with some basic data from your tax return and your bank and brokerage statements.

In addition to the income-based components of the EFC, there are asset-based components, McKenna said.

“The 529 plan, brokerage account and emergency funds are considered parental assets, while the UTMA and child’s savings accounts are the student’s assets,” he said. “Equity in your primary home is excluded, as are retirement plan assets.”

After a small allowance based on the age of the oldest parent, McKenna said, 6 percent of parental assets are considered available for education, while 20 percent of student assets are considered available.

“Student assets hurt the formula more than parental assets, but if you are not close to being eligible, there isn’t much value in repositioning these assets to the parent’s name,” he said.

There are some strategies you could take now, though, with your money going forward.

“Your retirement accounts are generally excluded from the calculation of eligibility for financial aid., therefore, you could maximize your annual contributions to IRA accounts leading up to your daughter’s base year of filing for financial aid,” said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

The base year refers to the tax year prior to the award year, usually the junior year of high school.

“You should also try to lower your adjusted gross income as much as possible in the base year,” he said. “You can do this by maximizing your contributions to your tax-deferred qualified plans.”

Certain types of property do not count as assets in the formula, such as automobiles, computers, boats, appliances, books, clothing and school supplies, Green said. If you are planning to make any major purchases, you should do so prior to the tax year before the award is to be provided.

“If other family members want to give gifts to help with education costs, ask them to hold off until your daughter graduates and then pay towards her student loans,” Green said. “If they want to make the gift now, then have them give you the money so it remains out of your daughter’s name.”

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This story was first posted in November 2014.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.