20 Apr I got a promotion. What does it mean for financial aid?

Q. My son is a high school junior and plans to go to college. I just got a promotion at work and I’m afraid we won’t qualify for financial aid now. I know there is some kind of delay when you complete the FAFSA. Will that help me when we apply?
— Mom

A. Congratulations on the promotion.

As you know, college is expensive. The additional income will help your family.

Let’s start with the different types of aid for college. There are essentially two:

First are grants, which is money given by the state or federal government, or the university or other organizations. These are usually need-based, which means it’s based on a family’s ability to pay, said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.

Then there are scholarships, usually given by a university or a third party. These funds can be need-based or merit-based, which means they’re based on the student’s achievements, she said.

“The beauty of grants and scholarships is that you don’t have to pay them back,” Kane said. “This is the best kind of aid.”

She said financial aid is based on income and assets. There is no specific income limit or cutoff for financial aid eligibility, she said. Eligibility for need-based financial aid depends on more than just income. That’s because the formulas used are complex, she said.

Many parents underestimate their ability to qualify for financial aid, she said, noting that the criteria changes from school to school.

“Your son may not get aid from a public university in your home state but he may from a private university,” she said.

To apply for financial aid, you will complete the Free Application for Federal Student Aid (FAFSA) each year. This will allow your son to be eligible for grant and loan based federal aid.

“The FAFSA uses family income information from two years prior or the prior-prior tax year,” Kane said. “Your promotion in 2022 won’t be reflected on the first FAFSA. That’s because for the 2023-2024 school year, you’ll use your 2021 tax return.”

The aid package he is offered may include federal student loans, but those will have to be paid back.

To get an idea of what you might pay for a particular college or university go to the Net Price Calculator on their websites. The U.S. Department of Education provides a calculator, too.

Kane said these calculators provide an estimate of what your son could receive in the form of scholarships, grants, and loans from the schools. It’s not guaranteed, but will give you an idea of potential cost, she said.

The colleges themselves aren’t the only place to look for aid, she said.

One place to look is Raise.me, which offers merit scholarships from participating colleges.

“Your son can track his grades, clubs, sports, volunteer activities, and more. He can then earn micro-scholarships from the colleges he’s interested in,” she said.

She said your son should start working on his college resume today so he can track every activity, award and recognition. This will make it easier for him when he applies to college in the fall but also as he applies for scholarships, she said.

Note that in many situations, you can negotiate for more money after he’s been accepted to college, Kane said.

“For merit-based scholarships, there may be an opportunity to get a higher scholarship amount if your son’s grades have improved or he’s received new accolades since he sent in the application,” she said.

But, she warned, you do not want to pit school against school. If you get less money from your son’s dream school, they will likely not respond kindly if you say you want more because your son got more money from another college.

Also note that there are tax savings that you should take advantage of should you qualify.

First, there’s the American Opportunity Tax Credit (AOTC).

“This is a tax credit for 100% of the first $2,000 and 25% of the next $2,000 of your son’s college tuition and related expenses,” she said. “You can get a maximum of $2,500 per student per year.”

Your son needs to be in school at least half time and he is only eligible for his first four years of college.

The credit phases out at higher income levels.

For those married filing jointly, the credit phases out between $160,000 and $180,000. At $180,000, you are no longer eligible, Kane said. The phase-out for singles is $80,000 to $90,000.

Then there’s the Lifetime Learning Tax Credit.

“You can claim 20% of up to $10,000 in tuition and fees,” she said, noting the income phaseouts are the same as the American Opportunity Tax Credit.

But you can’t double dip. You can choose either Lifetime Learning Tax Credit OR American Opportunity Tax Credit, not both.

“If you haven’t already done so, you must have a discussion with your son as to what you’re willing to pay for college,” Kane said. “This is a big financial decision, and he needs to know now what you’re willing to pay for as he starts the college search process.”

Discuss whether you’re willing to pay for any college, at any price, or if you’re willing to pay a certain dollar amount that is equal to in-state tuition at a public university.

“It is important for you all to know where you stand before he starts looking,” Kane said.

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This story was originally published on April 20, 2022.

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.