Citi Personal Wealth Management
Parents of college-bound kids who apply for financial aid to help cover the cost of school are often surprised at the package that's offered — be it a small subsidy, large loans, little or none of the prized grant money they were hoping for, or all the above.
To better understand financial aid, first a few misconceptions must be dispelled.
- Aid money comes from the federal government - and colleges. The U.S. distributes grant money each year, mostly to lower-income families. But the bulk of government aid consists of subsidized and unsubsidized loans. Colleges, meanwhile, also award significant amounts of grant money, though not as much as the federal government.
- There's no one "formula." The government and colleges differ in how they compute how much aid a family is eligible for. Strategies that can increase federal-aid eligibility, such as pouring money into your home, may not help under the college formula. (More on formulas later.)
- It's not all-or-nothing. Aid eligibility (nor the amount of support provided) won't vary drastically based on modest changes in your finances. By rearranging your finances, you might see only a marginal bump in financial aid.
Solely merit-based financial assistance isn't common. Unlike, say, a scholarship, financial assistance from a college is more likely to be contingent on need, no matter the student's academic credentials.
Expected Family Contributions, or EFC, is the amount an aid provider thinks a family can afford to pay toward college based on income, assets and other factors. Parents' and the student's finances are considered. The cost of college minus EFC equals how much aid a family receives (through grants, loans, work-study, etc.).
Again, the government's approach to calculating need differs from that of colleges, such as whether real estate assets are taken into account. If another family member is also in college, that factors in, too. Look for EFC calculators online to better gauge where you stand.
1. Savings in the student's name may have an impact. Unlike some custodial accounts, education savings accounts like 529 plans are typically considered the parents' asset, so the impact on aid is more limited. (The pros and cons of 529 plans vary by state and should be carefully reviewed.)
2. Manage your cash. Before you file for financial aid you may want to make that big purchase you've been considering (like a new car), or pay down your consumer debt, so you have less cash to report.
3. Be careful tapping into investments. The four-year period beginning with the second semester of a student's junior year in high school is used for evaluating family income as it relates to aid eligibility. Cashing out investments or withdrawing from a retirement account during this timeframe — even to help access funds to pay for college — could create income that negatively impacts aid eligibility.
4. Think Through Capital Gains. You might consider not selling investments with big unrealized capital gains during this same four-year period.
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