D-Day, or Deadline Day, for Early Decision applicants and a variety of Early Action options is just a week away on Nov. 1. Just after that crunch deadline is when many high school seniors will hopefully take a breath and perhaps even take a short-term break from college applications, since the next big deadline isn’t usually until Jan. 1.
For many parents, it’s reality-check time. Right about now is the first time they’re getting a grip on their future financial commitment. As the reality of the college price tag looms, parents are eager to learn about ways to maximize financial aid awards.
I reached out to my friend and colleague Lynn O’Shaughnessy, a speaker, journalist and best-selling author of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price to get her input on this all-important topic.
According to O’Shaughnessy, it is possible to increase eligibility for financial aid, although it’s usually just around the edges. She advises parents to be careful because pursuing some strategies to maximize financial aid can backfire and cost you more money down the road.
Check out her site, The College Solution, and her upcoming free webinars for more helpful information about paying for college, scholarships and financial aid.
Dates and times for O’Shaughnessy’s free webinars:
10/25 @ 8:30 p.m.
10/26 @ 8:30 p.m.
10/27 @ 3 p.m.
10/29 @ 3 p.m.
11/1 @ 8:30 p.m.
11/2 @ 8:30 p.m.
11/5 @ 3 p.m.
Here are two mistakes she wants everyone to be aware of:
- Failing to understand when increasing financial aid is possible.
If you have less money in the bank, your child should qualify for more financial aid. That is an easy assumption to make, but sometimes having fewer assets will be irrelevant.
In a recent email, a dad told me that he had been urged to limit his assets to qualify for financial aid. “I’ve been advised to do everything from spending down my investments to putting them in the hands of relatives in order to minimize their impact.” To his credit, the dad didn’t feel right hiding his assets, and he questioned the wisdom of spending down his cash since he needed it to pay for college.
I told the father that using either of these dubious strategies wouldn’t work because North Carolina State University, which is where his daughter attends, wouldn’t have awarded his family need-based financial aid anyway. Why? Because his daughter, who is a freshman, is an out-of-state student – and public universities routinely reserve their institutional grants for state residents.
General wisdom is that students are only eligible for institutional aid at public universities in their own state. Non-residents at state universities can typically only hope for merit scholarships from their institutions. Notable exceptions that are extremely popular in the Carolinas are the University of South Carolina and Clemson University; both schools offer merit scholarships to out-of-state students.
- Contributing more to retirement accounts.
It makes financial sense for parents to contribute to Individual Retirement Accounts, 401(k)s and other workplace retirement plans for their own future financial security, but doing so simply to increase financial aid is unlikely to help.
Many parents think that stuffing more money into their retirement accounts is a wise idea because the financial aid formulas only assess nonretirement assets when determining if a student is eligible for need-based aid.
For instance, the FAFSA doesn’t even ask if you have any money in qualified retirement accounts. So, you could have $1 million sitting in your IRA and 401(k), and it will never show up on the financial aid form.
There is a major problem with this strategy, however, which can turn it into a fruitless exercise. Starting two years before a child begins college, retirement contributions that parents make will be added back into their income.
Let’s assume, for example, that a parent contributed $10,000 into a 401(k). Once that money is inside the IRA, that $10,000 would no longer be considered an asset for financial aid purposes. However, that $10,000 contribution will still be counted as income on the financial aid forms.
Here’s why: When you file the FAFSA and CSS/Financial PROFILE, you must use two-year-old tax returns. On your tax return, you must declare certain types of untaxed income, such as retirement plan contributions. Thus, contributions to a qualified retirement plan will shelter the contributions as assets but will not shelter them as income.
If the parents add to retirement accounts three years before a child heading off to college then they could avoid declaring these contributions on the aid forms. Parents, however, are rarely exploring financial aid strategies three years in advance.
The only exception to this rule is contributions to a Roth IRA. Unlike other popular retirement accounts, contributions to a Roth don’t provide an upfront tax break, so they don’t generate untaxed income.