Maximizing college financial aid eligibility for your child can be overwhelming and difficult to navigate. From lowering your “assessable assets” to considering Roth IRAs for summer jobs, here are eight effective college financial aid strategies for getting the most aid out of the FAFSA for your child.
1. Roll custodial accounts like UTMA/UTGA accounts into 529s. This will lower Effective Family Contribution (EFC), since custodial accounts are treated as student assets, while 529s are treated as parental assets. Student assets are included in the EFC formula at 20% to 25%, while parental assets are included at only 5.6%. For purposes of maximizing financial aid, you probably want to avoid custodial accounts altogether.
2. Spend down children’s assets for college expenses ahead of parental assets. Since children’s assets count against you more in the financial aid formula than parental assets, prioritize spending assets held in the children’s name.
3. Maximize saving in retirement accounts like 401ks and IRAs. Unlike your taxable brokerage accounts, IRAs, 401ks and other qualified accounts aren’t counted towards EFC.
4. Pay debt to reduce parent assets. Paying off credit card debt or non-home mortgage debt lowers the FAFSA’s “assessable assets” and results in a lower Effective Family Contribution (EFC).
5. Be skeptical of advice to convert liquid assets into annuity/insurance assets. Since annuity and insurance assets aren’t assessable assets under the FAFSA, some product providers and insurance agents recommend a college financial aid strategy of converting cash or brokerage assets into annuities and insurance assets. However, it’s possible these conversions could cost you more in fees than the 5.64% decrease in EFC. Moreover, converting liquid assets into illiquid assets without increasing the rate of return is seldom a good idea. You don’t want to get into a situation where you’ve fundamentally changed your asset allocation and paid a large amount of fees to try and game the FAFSA, but then your child ends up not going to college anyways.
6. Consider Roth IRAs for summer jobs. If children are getting earned income through part-time employment and/or summer jobs, consider redirecting college savings from assessable assets like 529s to non-assessable Roth IRA assets. Roth IRAs are fantastic savings vehicles for college, regardless if they are opened by the parent or the child. You’ll have more investment options in the Roth IRA than a 529 account, and distributions from a Roth IRA used for Qualified Higher Education Expenses avoid the 10% early withdrawal penalty. Moreover, distributions from Roth IRAs are principal first, so you can withdraw the original contributions from the Roth IRA to pay for other expenses without subject to taxation or an early withdrawal penalty.
7. For parents going through a divorce, structure the divorce settlement with student aid in mind. Consider the custodial parent receiving non-assessable property (home) assets over assessable alimony income for financial aid purposes. Another financial aid strategy would be to consider delaying alimony until after FAFSA assessment years.
8. Coordinate grandparent college contributions. Encourage grandparents to redirect their gifts to college bound grandchildren to the parents of the college student, which avoids the gifts becoming assessable income. The grandparents could also just deposit assets in a 529, which is assessed at a much lower rate than direct gifts, or buy non-cash items for the student.
David Flores Wilson, CFP®, CFA, CDFA®, CCFC is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Wealth Advisor at Watts Capital. He can be reached at (917) 843-4366 and firstname.lastname@example.org.