With the mounting cost of a college education, families are seeking out ways to reduce the out-of-pocket cost for tuition. The Free Application for Federal Student Aid, or the “FAFSA”, is available to everyone, and is the best first step for families to potentially lower the cost of college tuition. The FAFSA is an annual application for need-based financial aid that requires reporting personal and family financial information to determine qualification for federal aid. Income and net worth of both the parent and the student are among a few factors important in determining the level of student aid. These amounts are used to calculate a family’s Expected Family Contribution (EFC) towards the cost of tuition, which is the minimum amount the family is expected to contribute towards the cost of college. Properly reporting both income and net worth on the FASFA can maximize a family’s potential for awarded financial aid.
The FASFA requests the applicant’s (i.e., both parent and student’s) “Adjusted Gross Income” (AGI) as part of the calculation to determine the amount of Federal aid that can be granted to the student. Because the income reported is AGI, applicants may be able to utilize strategies to lower AGI to achieve a higher financial aid award. One commonly used strategy involves realizing capital losses in a year; this can lower one’s AGI as the loss can offset any investment capital gains realized that year. Any excess losses can further reduce ordinary income up to $3,000 a year. Other tactics to reduce AGI include postponing or deferring bonuses to the next year or making larger pre-tax contributions to a company retirement plan (e.g., a 401(k) plan). Keep in mind, however, that these strategies require planning in advance, as the financial information reported on the FAFSA is from an earlier tax year. For example, for a student expecting to begin college in the Fall of 2018, taxable income from 2016 will be used on the application that first year.
An applicant’s “reportable assets” is another determining factor on the level of student aid awarded. Reducing assets, if possible, can help maximize the FAFSA award. To reduce assets required to be reported, one strategy is to accelerate an anticipated expense, such as buying a car or paying for a home improvement earlier than initially intended. This will reduce assets on the FAFSA, as cash, which is reportable as an asset, will decrease while a new car or renovated bathroom does not get reported as an asset on the FASFA. Debts are not reported on the FAFSA but can in some cases be utilized to maximize the FAFSA award. Similar to using excess cash for purchases, reducing cash levels by paying down existing debt can be an effective way to reduce reportable assets.
There are other lesser known tips to maximize potential aid, such as filing the application as early as possible, and filing each year regardless of asset or income levels. Because many awards are granted to students on a first-come, first-serve basis, it is best to submit the FAFSA application early. If filing before the tax return deadline in April, it is best to estimate tax information on the application and correct it later. Additionally, it is recommended to file a FAFSA each year regardless of asset and income levels. Many formulas to calculate aid divide the contribution among all children in college. If a family didn’t qualify with one child, it might qualify with two children in college at the same time. In addition, unexpected changes in situations can occur, such as a job loss or divorce, which can affect your submissions. Submitting the FAFSA application early and each year a student attends college will maximize a chance at receiving federal aid.
College is one of the biggest expenses in a person’s life, and the FAFSA is a great first step for families to take to potentially lower the cost of college tuition. Minimizing AGI, reducing reportable assets, and filing early each year are three tactics to maximize the potential financial aid award. It requires advanced planning, but can be done with the guidance of a financial/tax advisor. If you have any questions about the FAFSA application or other strategies to save for college, please feel free to contact us at Capstone Financial Advisors.