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Maximize college financial aid for clients’ children

Most financial planning clients would love to send their children to a highly selective college. Far fewer are happy to pay the tuition, which can climb above $70,000 a year.

Still, they might be heartened to learn that about 72% of U.S. college students get financial aid. With some careful planning, your clients’ children can be among them. In this quest, two documents will loom large. Families’ eligibility for need-based college financial aid is determined by one or more of two applications: the Free Application for Federal Student Aid and the College Scholarship Service Profile.

Most U.S. colleges and universities, including state schools, use FAFSA to determine need. About 400 schools — typically the more selective and therefore more expensive options — use the CSS. A group of 25 to 35 schools, called the 568 Presidents' Group, use a combination of the two applications to determine each student’s expected family contribution.

The gap between a school’s sticker price and the expected family contribution is the amount of need-based aid a student is eligible to receive. That help might come in the form of government grants, school-supplied grants, work-study jobs or loans.

Both the FAFSA and CSS look at how much income and assets the student and the student’s family have. They consider those assets differently, says Ian Aguilar, a planner at Mellen Money Management in Ponte Vedra, Florida. “The CSS Profile is more in-depth and looks at more assets," Aguilar says. "Generally speaking, your expected family contribution will come out higher with the CSS.”

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CSS results are also more open to an individual school’s interpretation than those of FAFSA. Families fill out both applications during the year before their child starts college, then repeat the application for the next year, and the next, until the child’s education is complete. Each application considers financial information from the previous year. If a student will begin school in the autumn of 2021, the family will fill out aid applications in 2020 using the 2019 tax return, as well as current levels of income, savings and assets. It’s therefore important to sort out the financial planning for aid during the student’s sophomore and junior years of high school.

To understand how client families can maximize their eligibility for need-based financial aid, it’s important to understand how both the FAFSA and the CSS look at family income and assets to calculate the expected family contribution.

The big bite: Student income and assets

For the 2018-2019 school year, individual students could earn up to $6,570 before FAFSA expected them to contribute some portion of income to paying for college. To earn more than that, a kid would need to work for more than 17 hours a week, 52 weeks a year at $7.25 an hour. That’s not a bar most students would clear. More likely, a student could earn a few thousand dollars at an afterschool or summer job — an amount that would not affect eligibility for need-based aid.

If a student does earn more than $6,570 annually, 50% goes toward the expected family contribution every year. There is no protected amount of student assets. The college aid calculators assume that families will spend between 20% and 25% of student assets annually on college tuition and fees.

The aid calculation takes a much smaller percentage of parents’ income and assets. Because college expenses take such a big bite of whatever a student has, children should have minimal or no assets in their own names. “Put the money in a retirement account,” suggests Greg Gorski, a planner at Blue Sky Financial Group in Pleasant Hill, California. “If the kid is a saver and has money in a bank account, consider what they’ll need for school and spend money on those things: clothes, a computer.” A car is another option.

The same is true of assets in an UTMA or any account held jointly by parent and child. “I generally tell my clients to make sure that all those custodial savings accounts are spent by the junior prom, to remove that piece of the formula,” says Sean Pearson, a planner in Conshohocken, Pennsylvania.

Nuanced nibbles: Parent income and assets
Because parents have financial responsibilities that most dependent students do not, both aid applications protect more parental income and assets. The exact amount depends on a complicated calculation that considers the parents’ ages, number of children and other factors. Beyond that number, the FAFSA and CSS expect parents to put between 22% and 47% of adjusted gross income toward college expenses. It’s therefore helpful to minimize adjusted gross income, if possible.

“If someone is working a standard 9-to-5 job and there are no bonuses or options, there may not be much you can do to lower income,” says Robert Falcon, owner of Falcon Wealth Managers in Concordville, Pennsylvania.

Clients with more complex employment situations have additional avenues. Stock options, if a client has them, shouldn’t be exercised during the year that the application will reflect. Get bonuses deferred, if possible. If you own a business, accelerate expenses and delay sending out invoices. All parents should pay off balances on credit cards, car loans and student loans. Pay for home repairs or improvements. Make an estimated tax payment or contribute early to a Roth IRA or other retirement fund. Maximize HSA contributions.

Charitable and medical deductions can also help, if they’re large enough. A family that is planning a large charitable contribution, but hasn’t yet selected a charity, could put money in a donor-advised fund.

Both the FAFSA and the CSS see parental income as the primary source for expected family contribution. The calculator also takes just under 6% of parents’ non-retirement assets. The FAFSA doesn’t consider home equity, retirement assets or assets owned by a family business as potential sources of college funding, though it does count 401(k) contributions as income for the year they’re made. The CSS may consider some portion of all those assets.

Should clients try to pay down their mortgage? “That depends on whether the FAFSA or CSS is what you’re looking to maximize,” says Kenneth Waltzer, a planner at KCS Wealth in Los Angeles. He cautions that families might pay off a home and then find that they need that cash after all. “You’d have to refinance to get the money back,” Waltzer says.

Both the FAFSA and CSS assess the equity in vacation homes and investment properties. Paying down the mortgage on an investment property may make sense because the interest rate is typically higher than on a primary residence.

Choice still best
Although it’s good to think strategically about financial aid, “you don’t want to derail other financial planning goals,” Pearson says. At the end of the day, it’s good to have assets that can help pay for college, even if they don’t put families in a perfect position to receive financial aid.

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