01 Oct How much will my raise hurt financial aid?

Q. I got a big jump in income — from $65,000 to $94,000 a year. My youngest is still in college and I know this will hurt her financial aid next year. What can I do to minimize the damage?

A. Congrats on the big raise!

It may be tough to “minimize the damage” in terms of financial aid, but let’s try.

Need-based financial aid formulas for federal, school, and most state programs are calculated using a number of factors, including parent/student income, assets, and how much, if any, they have saved for education, including balances in 529 accounts, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

Your data results in a number called the Expected Family Contribution, or EFC, and the EFC is compared to the cost of attendance to determine a student’s eligibility for aid, DeFelice said.

“Families generally will get less aid as their EFC comes closer to the cost of admission,” he said. “Unfortunately, the calculations used in these formulas are heavily weighted towards income.”

A household’s discretionary income has a much greater impact on eligibility for need-based financial aid than assets do, he said.

To give you a basic guideline, DeFelice said, every $10,000 increase in parent income will reduce the amount of need-based financial aid awarded by around $3000.

Given the big jump in income you received, this will obviously affect what you qualify for, but you can try to limit the hit by taking a few actions.

First, if the income increase was due to an unusual circumstance, such as a special bonus that isn’t guaranteed to be there each year, you could ask the college financial aid office for a professional judgment review, DeFelice said.

“You would then have to provide documentation demonstrating that the bonus was a one-time event that is not indicative of future earnings,” he said. “However, if the increased salary was due to a permanent raise or a new position with a higher pay grid, then congrats. But it won’t help you win any additional aid.”

Next, you may be able to employ several strategies during the college years to reduce your adjusted gross income through certain exclusions that are not “added back in” by the financial aid formulas, DeFelice said.

“These can include participating in employer provided programs that reduce taxable income such as: employer-provided health insurance, health savings accounts, and flexible spending (cafeteria) plans,” he said. “Increasing your retirement plan contributions will not help though – even though this will reduce your AGI, the contributions you make will get added back in as discretionary income for the financial aid formulas.”

Brian Power, a certified financial planner with Gateway Advisory in Westfield, said that even though 401(k) contributions won’t lower your income, you’re still better off accumulating assets in a retirement account instead of a savings or brokerage account becaause financial aid formulas don’t count retirement accounts towards the EFC.

Maxing out — $18,000 in 2015 with an additional $6,000 catch-up for those 50 and over — still makes sense for most long-term financial plans.

Power said you could also realize losses in your investment portfolios — and most people have losses in the current climate — to offset any realized gains that may get reported this year.

“If there are not realized gains to offset with the realized losses, they will get $3,000 of losses to offset regular income,” Power said.

You should also speak with your accountant to see if you can pre-pay certain deductible expenses in 2015. For example, you may be able to pay your 2016 property taxes in 2015 or pay off any substantial medical bills and receive a deduction for that in 2015.

Try to avoid any circumstances that will increase your total income further, such as taking retirement plan distributions or exercising stock options, DeFelice said.

Also take a look at how your assets are allocated.

Ideally, you want to have as little as possible in your child’s name because those assets will carry a much higher weighting in the formula, DeFelice said.

“Parents are only expected to contribute 5.6 percent of their `unprotected’ assets towards college,” he said. “When filling out the financial aid forms, be sure not to list your retirement account balances and primary residence equity – as these are considered `protected’ amounts and do not count.”

Cash savings and non-qualified investment accounts do count, though, but you can take some simple steps to reduce the amount of cash on hand.

Pay down any credit card debt you may have, or if none exists, make some extra mortgage payments, DeFelice suggests. Or spend some of it on school supplies or upgrade your student’s technology.

“This may sound counterintuitive when you are scrambling to pay tuition bills, but with interest rates still near zero you may be able to find a better use for your cash instead of claiming it on the FAFSA form and getting less aid,” he said.

Also be aware that distributions from any grandparent-owned 529 Plans will count as income for the student, which carries a higher weighting than parent income, DeFelice said.

Most of all, don’t be afraid to get educated.

“Pick up the phone and call the school’s financial aid office,” he said. “Explore all of your alternatives before filing, and don’t assume that no aid will be available.”

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This story was first posted in October 2015.