As a general rule, unless the family is fairly destitute, a decrease in the EFC will yield an increase in eligibility for student loans and work-study, not grants. Just because you demonstrate financial need doesn't mean that the school and government will throw grants and scholarships your way.

A Word About Honesty

We have not included any strategies that we consider unethical, dishonest, or illegal. For example, although we may describe some strategies for sheltering assets, we do not provide techniques for hiding assets. This is a very important distinction. Likewise, we strongly discourage any family from trying to qualify a truly dependent child as an independent or providing false information on a financial aid form.

It should go without saying, but honesty is the best policy. Tell the truth on your financial aid applications. It may hurt, but the penalties for lying are severe.

Be very careful about following any unethical advice. Financial aid administrators are obligated to notify the US Department of Education when they encounter cases of fraud. (If they don't, their school is held liable when the US Department of Education audits them.) Every school verifies the FAFSAs of at least one-third of their students, and some schools verify 100% of the financial aid applications. This is in contrast with the IRS, which audits only a very small percentage of tax returns. So if you lie on your financial aid forms, there's a very good chance you'll get caught.

The FAFSA includes the following warning on the front:

WARNING: You must fill out this form accurately. The information that you supply can be verified by your college, your state, or by the U.S. Department of Education.

You may be asked to provide U.S. income tax returns, the worksheets in this booklet and other information. If you can't or don't provide these records to your college, you may not get Federal student aid. If you get Federal student aid based on incorrect information, you will have to pay it back; you may also have to pay fines and fees. If you purposely give false or misleading information on your application, you may be fined $20,000, sent to prison, or both.

Schools are getting much better at catching fraud. For example, many schools now require parents who claim to be enrolled in college to not only provide proof of registration, but a copy of the paid tuition bill. Some go even so far as to verify the enrollment with the other school. This is because some financial aid consultants were advising parents to enroll at another school to qualify themselves as a member of the household enrolled in college and then let the enrollment automatically cancel through nonpayment. Similarly, many schools now require families to sign a release to let the school obtain the actual income tax returns from the IRS, because some families were providing false copies of their tax returns. Also, in cases of divorce or separation, financial aid offices ask for proof of legal separation, because some families have been falsely claiming to be separated in order to increase eligibility for financial aid. Financial aid administrators are especially suspicious when both parents live at the same address.

A good rule of thumb to follow is: If a reasonable person would feel uncomfortable telling a financial aid administrator about using a strategy, don't use it. For example, a reasonable person would not have a problem with advice to pay off all credit card debt, but would definitely have problems with advice to provide false copies of income tax returns or to transfer assets temporarily to a relative.

Ask your school's financial aid administrator if you have questions about the appropriateness of using any strategy.

Some families feel that a college education should be free ride and that they are entitled to any financial aid for which they qualify, especially in light of the increasingly high cost of a college education. Remember, though, that if you succeed in making yourself look less affluent than you really are, you're making it harder for the financial aid administrators to distribute the limited financial aid funds fairly. Do you really want to be reducing the amount of aid available to lower income families? Ask yourself whether using each strategy fits in with your ethical values.

Top 10 Strategies

These strategies will have the largest impact on need-based aid eligibility.

1. Save money in the parent's name, not the child's name. Or use a savings vehicle that is treated like a parent asset, such as a 529 college savings plan, prepaid tuition plan or Coverdell Education Savings Account.

2. Pay off consumer debt, such as credit card and auto loan balances.

3. Parents should go back to school to further their own education at the same time as their children, or have multiple children in college at the same time. The more family members in college simultaneously, the more aid will be available to each. (Note: This strategy is not as effective as it once was, as whether the parents count is now an item subject to professional judgment review. The school will want to see documentation that the parent is genuinely pursuing a degree, since this is prone to fraud. Many schools will merely reduce income by the amount the family spends for the parent's education, instead of increasing the number in college figure.)

4. Spend down the student's assets and income first.

5. Accelerate necessary expenses, to reduce available cash. For example, if you need a new car or computer, buy it before you file the FAFSA.

6. If you feel that your family's financial circumstances are unusual, make an appointment with the financial aid administrator at your school to review your case. Sometimes the school will be able to adjust your financial aid package to compensate using a process known as Professional Judgment.

7. Minimize capital gains.

8. Maximize contributions to your retirement fund.

9. Do not withdraw money from your retirement fund to pay for school, as distributions count as taxable income, reducing next year's financial aid eligibility. If you must use money from your retirement funds, borrow the money from the retirement fund instead of getting a distribution.

10. Minimize educational debt.

11. Ask grandparents to wait until the grandchild graduates before giving them money to help with their education.

12. Trust funds are generally ineffective at sheltering money from the need analysis process and can backfire on you.

13. Prepay your mortgage.

14. A section 529 college savings plan owned by a parent has minimal impact on financial aid, and one owned by a grandparent has no impact on financial aid.

15. Choose the date to submit the FAFSA carefully, as assets and student marital status are specified as of the application date.

Introduction

In the strategies that follow, the term base year refers to the tax year prior to the award year, where the award year is the academic year for which aid is requested. For example, if the student who is applying for financial aid will matriculate in September 2008, the base year is the calendar year from January 1 through December 31, 2007. The need analysis process uses financial information from the base year to estimate the expected family contribution. Many of these strategies are simply methods of minimizing income during the base year. Likewise, the value of assets are determined at the time of application and may have no relation to their value during the award year.

Keep in mind that the federal regulations governing financial aid change frequently. There is no guarantee that any of these strategies will work in the long run, since the federal need analysis methodology is changed annually by Congress.

Basic Principles

There are several basic principles behind the strategies for maximizing eligibility for financial aid. These principles include:

1. Reducing income during the base years.

2. Reducing "included" assets. There are two types of assets, those that are included in the need analysis formulas and those that aren't. Converting included assets into nonincluded assets will increase eligibility by sheltering them from the need analysis process. However, most financial planners recommend that parents maintain a contingency fund equal to six months salary in relatively liquid form for emergencies and other unforeseeable circumstances.

3. Increasing the number of family members enrolled in college and pursuing a degree or certificate at the same time. The family contribution is split among all family members who will be enrolled in college, so the more family members in college, the greater financial need for each.

4. Taking advantage of the differences in the way the need analysis process assesses the assets and income of the student and his or her parents.

5. Changing the student's status from dependent to independent. This is generally not very easy to do.

Income

1. If you estimate your income on the Free Application for Federal Student Aid (FAFSA), don't overestimate. Using too high an income figure can have a significant impact on your expected family contribution. If possible, do your taxes early, so you can use the correct figures instead of estimating.

2. Be careful when reporting the amount of taxes paid. Many people confuse the amount of withholding (the figure from the W2s) with the amount of taxes paid. Don't make this mistake.

3. Avoid incurring capital gains during the base year. Capital gains are treated like income. Sell the stocks and bonds during the sophomore year in high school. If you must sell the securities while your child is in college, wait until April of their junior year, when their last financial aid application has been filed. If you sell the securities during their freshman, sophomore, or junior year in college, it will reduce their eligibility for aid during the subsequent year. You could try to compensate by selling some of the losers in your portfolio.

   Note that many schools do not allow offsetting losses. For example, you cannot use capital losses to offset your salary.

4. Do not take money out of your retirement fund to pay for educational expenses. Retirement funds are sheltered from the need analysis process. If you withdraw too much money from your pension, or withdraw them before the financial aid application is filed, you will have converted them into an included asset. It is much better to spend your liquid assets, such as cash in bank accounts, first.

   Moreover, when you withdraw funds from your pension, you may incur a penalty. It may be better to borrow money from the pension, if possible. You cannot borrow against your IRA, but you may be able to borrow against your 401(k) plan.

5. In certain circumstances, a slight decrease in the parents' income may yield a significant increase in eligibility for Federal financial aid. If both of the following are true
   • The parents' adjusted gross income is under $50,000.
   • All family members are eligible to file an IRS Form 1040A or IRS Form 1040EZ income tax return or aren't required to file (or were eligible for certain federal means-tested programs, such as SSI, the food stamp program, the free and reduced price school lunch program, TANFF, and WIC).
   then the family qualifies for the Simplified Needs Test which disregards assets when determining the expected family contribution. So if the family has a substantial amount of assets and the parents' income is close to $50,000, the parents should consider taking steps to reduce their income below the $50,000 threshold. (There is also a special test called Automatic Zero EFC which applies when the parents' income (AGI) is less than $20,000.)

   Some methods of reducing the parents' income include:

   • Taking an unpaid leave of absence.
   • Incurring a capital loss by selling off bad investments.
   • Postponing any bonuses until after the base year.
   • If the family runs its own business, they can reduce the salaries of family members during the base year. (This will only have an effect if the family business is a C corporation. S corporations, partnerships and sole proprietorships will pass through their income to the owners.) The income retained by the corporation will still be considered as a business or investment asset, but assets are treated more favorably than income. Also, assets can be disregarded if the family qualifies for the simplified needs test.
   • Making a larger contribution to retirement funds.

   Note that making a larger contribution to the parents' retirement funds doesn't normally affect eligibility for financial aid, because the contribution gets counted in the formula as untaxed income. It only works in this case because the Simplified Needs Test depends on the AGI and not the total income or total available income.

6. If both members of a married couple have earned income, but one falls below the income threshold for filing an income tax return and the other falls above the threshold, it may be beneficial for the member with income above the threshold to file as married filing separate. This will allow the other member to not file a return. This yields a lower AGI. Normally, if a married couple has no AGI but earned income, the federal need analysis methodology substitutes earned income for the AGI. But in this case there is nonzero AGI, so the substitution of earned income for AGI does not occur. In effect, the income of the nonfiling spouse gets excluded from the need analysis assessment of income, but still triggers the allowances against income. The US Department of Education's published guidance on nonfilers specifically indicates that it is inappropriate to include that income as untaxed income. Note, however, that the Department could correct their logic error in the future, and financial aid administrators are within their rights to use professional judgment to include the income within AGI. Note also that filing a married filing separate return eliminates eligibility for certain tax deductions and tax credits, including several of the education tax benefits. But it would be worthwhile running the numbers both ways (on both the income tax returns and need analysis), to evaluate the total financial impact.

After the child reaches age 18 (age 14 in 2005 and before), a family can realize tax savings by placing up to $24,000 a year in assets in the child's name, because the income from the assets will be taxed at the child's tax bracket. (The Uniform Gift to Minors provision in the tax code allows each parent to give up to $12,000 a year to each child without incurring a gift tax.)

But the need analysis formulas assume that the child contributes a much greater portion of his or her assets (and income) than the parents, with the result that such tax-sheltering strategies often significantly reduce eligibility for financial aid. In most cases the financial aid "tax" overwhelms the income tax savings. Parents should carefully consider the financial aid implications before transferring money into their child's name. The advice in this section discusses the advisability of various asset shifting strategies.

The parents cannot just transfer the assets back into their own name as college approaches. The assets legally belong to the child, and the child could sue the parents to recover them. (This happens more often than you might think. For example, it isn't uncommon for a child to sue the non-custodial parent in divorce cases.) Moreover, the IRS could assess back taxes and penalties for such a transfer of assets.

Nevertheless, there are ways to legally shift the child's assets back into the parents' name. For example, the parents could spend the child's assets on the child's behalf, provided that the expenses are for the child's benefit and not part of the usual parental obligations. For instance, the parent may use the child's assets to pay for summer camp but not for groceries, clothing, health care or rent. An accountant will be able to help you identify which expenses qualify. If you can transfer the child's assets back to the parents in this fashion, do it before the base year to reduce the impact these assets will have on the need analysis process.

Section 8019(d) of the Deficit Reduction Act of 2005 (Public Law 109-171) modified the financial aid treatment of section 529 college savings plans, prepaid tuition plans, and Coverdell Education Savings Accounts for dependent students. Effective July 1, 2006, the custodial versions of these savings vehicles are not considered an asset of a dependent student. The US Department of Education is interpreting the law to indicate that such funds are not reported on the FAFSA. (See Dear Colleague Letter GEN-06-05 which suggests that if the student and not the parent is the account owner of the plan, it is not reported as an asset at all.) Specifically, to be disregarded as an asset, all of the following must be true:

• The account must be a custodial account, meaning that the student is both the account owner and beneficiary.
• Only 529 College Savings Plans, Prepaid Tuition Plans and Coverdell Education Savings Accounts qualify.
• The student must be a dependent student.

• Regular custodial accounts, such as UGMA/UTMA bank accounts, are reported as an asset of the student.
• If the student is an independent student, the custodial versions of 529 College Savings Plans, Prepaid Tuition Plans, and Coverdell Education Savings Accounts are reported as an asset of the student.
• If the student is dependent, but the 529 college Savings Plan, Prepaid Tuition Plan or Coverdell Education Savings Account is not a custodial account, the account is reported as a parent asset.

Before worrying about shifting assets, first determine who owns the asset. For example, a bank CD in the parents' name "in trust for" the child's name is generally a parent asset. The test to use is to identify who is responsible for paying taxes on the asset's earnings. For example, if the parent receives a 1099 that reported the earnings on the parent's social security number, the asset is owned by the parent. Likewise, if the earnings were reported on the child's social security number, even if the parent files taxes on behalf of the child, the asset is owned by the child.

Most need analysis formulas shelter $35,000 to $60,000 of the parents' assets, depending on the age of the older parent. For most families of college-age children the asset protection allowance (APA) will be around $45,000 to $50,000. (The median age of parents with college-age children is 48. The asset protection allowance for a family with two parents where the older parent is 48 years old is $47,700 using 2006-2007 need analysis tables. The amount fluctuates up and down from year to year, depending on complex factors involving the consumer price index.) As a result, only about 10% of families have any contribution from the parent assets. Even when parent assets exceed this threshold, they have a negligible impact on the family's expected family contribution. A $10,000 decrease in parent assets, for example, will yield only about a 560 decrease in the EFC. (Also, the Federal Methodology's Simplified Needs Test will ignore assets altogether when the parents' income is less than $50,000 and all family members are eligible to file an IRS Form 1040A or 1040EZ or aren't required to file an income tax return.) Thus parent assets do not have as much of an impact as is normally assumed by most parents.

So before you spend much effort trying to optimize the parents' assets, use FinAid's EFC calculator in detailed mode and see whether there is any contribution from parent assets.

1. If your children have any hope of being eligible for financial aid, do not put any assets in your children's names, regardless of the tax savings. Likewise, don't pay your children a salary as part of the family business. On the other hand, if you are absolutely certain that your children will not qualify for financial aid, take advantage of all the tax breaks you can get. But be very careful about assuming that you won't be eligible for financial aid because you earn too much or have too many assets, since parents are often mistaken when they make this assumption.

2. Spend the student's assets before you touch any of the parent's assets. Since the student's assets are "taxed" at a much higher rate in the need analysis formula than the parents, why let them be taxed a second time during the next year? If possible, spend the student's savings to zero during the first year.

   For example, suppose the student has a $20,000 college fund in his or her own name and the school calculates an expected family contribution of $13,000, with $7,000 from the student and $6,000 from the parents. (This assumes that the parents have $107,000 in assets above any asset protection allowance, that student assets are assessed at 35% and parent assets at a maximum rate of 5.64%. Effective July 1, 2007, the student asset conversion rate will change from 35% to 20%.) These student and parent contribution figures are not targets. Rather than have the parents contribute $6,000 during the first year, spend all $13,000 from the student's college fund. After all, the purpose of the college fund is to pay for the child's college education. The following tables show the impact of three different asset spending policies:

   1. Spend student and parent assets according to the need analysis expected contributions.

      Year	Student Assets	Parent Assets
      1	$20,000 - $7,000 = $13,000	$50,000 - $6,000 = $44,000
      2	$13,000 - $4,550 = $8,450	$44,000 - $5,280 = $38,720
      3	$8,450 - $2,958 = $5,493	$38,720 - $4,646 = $34,074
      4	$5,493 - $1,923 = $3,570	$34,074 - $4,089 = $29,985
      Remainder	$3,570	$29,985

      This yields a total of $33,555 in family assets left over when the student graduates.

   2. Spend the parent assets before touching the student assets.

      Year	Student Assets	Parent Assets
      1	$20,000 - $0 = $20,000	$50,000 - $6,000 - $7,000 = $37,000
      2	$20,000 - $0 = $20,000	$37,000 - $4,440 - $7,000 = $25,560
      3	$20,000 - $0 = $20,000	$25,560 - $3,067 - $7,000 = $15,493
      4	$20,000 - $0 = $20,000	$15,493 - $1,859 - $7,000 = $6,634
      Remainder	$20,000	$6,634

      This yields a total of $26,634 in family assets left over when the student graduates.

   3. Spend the student assets before touching the parent assets.

      Year	Student Assets	Parent Assets
      1	$20,000 - $7,000 - $6,000 = $7,000	$50,000 - $0 = $50,000
      2	$7,000 - $2,450 - $4,550 = $0	$50,000 - $1,450 = $48,550
      3	$0	$48,550 - $5,826 = $42,724
      4	$0	$42,724 - $5,127 = $37,597
      Remainder	$0	$37,597

      This yields a total of $37,597 in family assets left over when the student graduates.

   It is clear that spending the student assets first leaves the family with the most money left over when the student has finally graduated. This is a simplified example, but the principle is valid even for more complicated examples.

   Moreover, suppose the cost of attendance is $25,000 and the school gives the student $2,000 in grants, $7,000 in loans and $3,000 in employment during the first year. It is better for the family, financially, to refuse the loans and instead spend all $20,000 of the student's college fund during the first year.

3. The assets of other children are not considered by the need analysis formula. So putting parent assets in the name of a younger (or older) sibling can help shelter them from the need analysis. On the other hand, when that child enrolls in college, his or her assets will be assessed at the usual rate for students.

   Assuming that the family follows a policy of spending the student's assets first, putting assets in the name of a younger child might yield a small increase in the family's overall eligibility for financial aid. The calculations are so complicated, however, and require so many questionable assumptions that this strategy is probably not worthwhile. The only case in which this strategy might work is when the younger sibling will never attend college, as might happen with a severely disabled child. On the other hand, many schools now ask for the assets owned by the student's siblings, so this strategy may affect the awarding of institutional funds.

4. Certain types of property, such as automobiles, computers, boats, furniture, appliances, books, clothing and school supplies, do not count as assets. If you will need to make certain major purchases, such as buying a new car, do it by the base year so that your liquid assets are reduced. We are not suggesting that you go on a spending spree, but simply accelerate a few necessary expenses. For example, if the student will need a computer, automobile, dorm refrigerator and microwave oven for school, it may be worthwhile to buy them before the student enters college. Since student assets count more heavily than parent assets, this strategy should apply mainly to items needed by the student and purchased using his or her own money.

   For example, if you've been saving money in the bank for a specific purpose, such as a big dollar-item purchase, use it for that purpose before you file the FAFSA, not after. You cannot ignore the money even if you plan to use it the day after you file the FAFSA. If the money is there, even only temporarily, it must be reported.

   Needless to say, the student's assets should be spent before dipping into the parent's assets. So instead of giving the student a car, the parents should let the student buy a car with the student's own money.

   Note that computer costs drop significantly every year and many schools have arranged special educational discounts with major computer manufacturers, so it may not be worthwhile to buy a computer ahead of time. Other expenses, such as a dorm fridge and microwave oven, are definitely worthwhile.

   The federal methodology does not count boats as an asset, but several private colleges and universities count the family boat as an asset when allocating institutional funds. Likewise, some schools will ask whether the student owns a car and when it was purchased.

5. If grandparents want to give money to the children to help them pay for their education, ask them to wait until the child graduates and then pay off the child's student loans. If they can't wait, have them give the money to the parents, not the children, so that the money is assessed at the parent's rate in the needs analysis process. Ask the school if they have an option whereby the grandparents can pay the money directly to the school to cover the child's educational expenses without impacting the child's eligibility for financial aid.

6. Trust funds are generally ineffective at sheltering assets. Moreover, if the fund is set up to prevent the trustees from spending the principal, it can harm the student's eligibility for financial aid. The school will assess the entire trust as if it were a student asset, regardless of any restrictions on the principal. Since the student can't spend down the principal, the trust will represent an annual drain on the student's finances by increasing the student contribution.

7. Retirement funds and pensions are generally not considered assets by both the Federal Methodology and the Institutional Methodology need analysis formulas. You can shelter a considerable portion of your assets by making the maximum contributions to these funds in the years before the base year. Likewise, tax-deferred annuities and life insurance policies (e.g., single-premium, universal and whole life insurance policies) are not considered assets by the need analysis system.

   During the base year, however, any pre-tax contributions to retirement funds are not sheltered because the need analysis formulas count these contributions as untaxed income. It is still worth contributing to your retirement fund during the base year, because this shelters the money from being assessed during the subsequent years.

8. Small businesses that are owned and controlled by the family are excluded as assets on the FAFSA. Small businesses are defined as having 100 or fewer full-time-equivalent employees. The family as listed in household size on the FAFSA must own and control more than half the business. A partnership where the family only owns 50% of the business is not excluded.

9. Real estate is normally treated as an investment asset, not a business asset, unless it is part of a formally recognized business that provides services beyond utilities and trash collection, such as maid service. However, incorporating a business and transferring the real estate to the business bypasses this restriction, since a corporation is a separate legal entity. When combined with the small business exclusion, this can cause real estate to change from being reported as an investment asset to being entirely excluded from assets.

10. For institutional need analysis, do not overestimate the fair market value of your home. If you have a recently assessed valuation or appraisal, use that figure. Otherwise you might wish to use the Federal Housing Index Calculator to get the minimum derived value of your home, a very conservative estimate of the current market value.

Loans

1. Avoid consumer debt, such as high credit card balances and car loans. Consumer debt isn't counted in the need analysis formula, so there's no benefit to having a credit card balance. Paying off your credit card balances and auto loans will reduce your available cash, thereby increasing your eligibility for financial aid. Moreover, as any financial planner will tell you, the high interest rates charged by card issuers are costing you a lot of money and the interest charges are not deductible. You would be better off eliminating all credit card debt, even if you have to deplete your cash to zero or take out a home equity loan.

   The only kind of debt that counts in the need analysis process is that which is secured by property. For example, the mortgage on a second (vacation) home offsets the value of the home and a capital loan for your business offsets the value of the equipment purchased using the loan.

2. The Federal need analysis methodology does not consider the equity in the family's primary residence. So to maximize your eligibility for Federal aid, you could use your cash and other included assets to prepay part of your mortgage. Many private colleges and universities, however, do count your home as an asset when allocating institutional funds. If so, it may be worthwhile to get a home equity loan to provide funds for your children's education. Not only are the interest payments tax deductible, but the loan reduces your assets.

3. If you decide to get a home equity loan to help pay for your college expenses, get a home equity line of credit, not a loan. When you get a loan and don't spend all of the money before you file the next financial aid form, you'll have created an asset that shows up in the need analysis and you're also paying interest on the full amount of the loan. With a line of credit, you borrow only the portion you actually use.

4. In most cases, the interest rate on educational loans is better than the interest rate on home equity loans. On the other hand, the interest payments on your mortgage are tax deductible. Only a limited portion of the interest payments on student loans is deductible, and the deduction is subject to income phaseouts. All things considered, however, educational loans are usually the financially superior choice.