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posted by: Radnor Financial Advisors

How to Maximize Your Financial Aid

The cost of college is one of the most important concerns many families face. Even those who save considerably, discover that without some additional form of aid, their kids may be limited in their choice of school. However, with proper planning it may be possible to tailor a strategy that will maximize financial aid eligibility and minimize out of pocket costs or the need for student loans.

Although calculating financial federal aid eligibility is complex, developing an understanding of how assets and income are factored in to the calculations is a helpful first step to developing and implementing an effective financial aid strategy. Most families applying for need-based financial aid need only complete the Free Application for Federal Student Aid form (FAFSA). FAFSA is used to determine federal financial aid eligibility, grants, and scholarships for most state and private institutions. Roughly 400 schools in the US also require students to complete the CSS Profile in addition to FAFSA in order to apply for aid. Both forms are available for completion online (FAFSA ) (CSS Profile).

Both applications collect family financial information in order to determine the expected family contribution (EFC), or minimum amount a family is deemed to be able to contribute toward the cost of college. The amount of aid a student is eligible for is the cost of attendance at the school less their EFC. The EFC accounts for variables such as size of family and number of college-aged children (both are treated favorably in terms of decreasing the EFC), along with income and assets for the parents and students (which are the key variables in calculating EFC). The FAFSA and CSS Profile gather similar information, although the CSS Profile formula factors in additional items such as home equity and businesses valuation in determining EFC.

The FAFSA and CSS Profile are available in October of a student’s senior year of high school and each year thereafter until the year before they graduate from college. However, the income figure used to determine the level of need is based on the two- year’s prior tax return. For example, those applying for 2019-2020 financial aid will use 2017 tax return information to complete the application.

Parental income is the most important factor for financial aid eligibility, as the EFC formula for FAFSA and CSS Profile consider up to 47% of parental AGI (on a progressive scale depending on AGI amount) in determining the EFC. In addition to income, parental non-retirement assets are factored into the calculation at up to 5.64%. In comparison, up to 50% of student income and 20% of student assets are included in the EFC calculation. Worthy of note, retirement assets are NOT included in the EFC calculation, while other assets such as home equity, non-qualified annuities, and value of small businesses are also excluded from FAFSA (although they are included in the CSS Profile calculation).

Given the parameters of the EFC calculation, there are several ways to improve upon financial aid eligibility:

  • Develop a strategy for family contributions – if grandparents or other relatives would like to assist with college expenses, delay the family contributions until the student’s junior year (or second to last year of school) so that the contributions (which would be considered income for the student and count up to 50% for the EFC calculation) would not be included in the two-year prior tax returns for EFC calculation.
  • Max out your retirement accounts in the years leading up to your children attending college. Retirement assets are excluded from the calculation (although you will need to add back contributions you make into your income in the year you apply).
  • Pay down debt using taxable account proceeds (which lowers interest costs and reduces your investment account balance) in advance of the application process. Please note, given home equity’s inclusion in the CSS Profile, paying down a mortgage may not be as effective a strategy if the school requires the CSS Profile also be completed.
  • Do NOT open UTMA/UGMA accounts for your children or other accounts titled in their name (since these assets could count up to 20% in the EFC calculation). Instead, utilize amore tax and aid efficient vehicle, such as a 529 education savings account, that can be titled in the parent’s name for the child’s benefit and allows for tax deferred growth and tax/penalty free withdrawals for qualified education expenses.
  • Reduce income and/or avoid unnecessary income (such as realizing large capital gains) during years you apply for aid.

In addition to the above suggestions for need-based aid, students and parents should also fully investigate the types of merit-based aid, grants, and loans that may be available to them directly from the school. Schools typically base aid packages on uniqueness and desirability of students to the school, which can result in considerable variability of aid packages from one school to another.

In summary, college is expensive and costs continue to grow. College funding is an extremely important and extremely complex topic for the majority of families. Given the number of variables at play and complexity, even minor differences in underlying financials can significantly impact a family’s aid eligibility and ultimate costs. As such, it is critical to develop a comprehensive strategy for college savings and financial aid to assure you maximize your student’s financial aid eligibility.


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