Ways to Maximize a Financial Aid Package

Parents often want to know if there are ways that they can increase their chances for financial aid. They often think that positioning their money creatively will boost their chances. Much of the time this isn’t wise or necessary.

Whether your child will qualify for need-based financial aid will typically depend heavily on these factors:

  • Parental income
  • Number of students in household
  • Number of children in college simultaneously
  • Whether or not parents are divorced

Some of a family’s assets will matter, but not as much as you might think.

Retirement assets are not counted in financial aid formulas. And not all of the cash in college accounts and taxable accounts is counted either.

Maximizing eligibility for aid can often only be tweaked at the margins. Consequently, some of the suggestions I’m making here may not have much, if any, impact on increasing financial awards.

Before you try any strategies involving your assets, run the numbers on the College Board’s Expected Family Contribution calculator. You may discover that making any moves will not lower your Expected Family Contribution.

Consult Real College Experts

You should also consider consulting a tax professional or financial planner who is an expert on college financing before making any significant moves. But be careful whom you select. Unfortunately, many self-described college financing experts are insurance agents who know little about college financing.

These agents often troll for clients by holding free college workshops. They will promise to help you boost your financial aid, but their prime goal is typically to sell you annuities or life insurance to hide your assets. This is a very expensive move and the insurance agent will pocket a hefty commission for a misguided financial transaction.

Here is a link to an excellent article that my friend Kim Clark of Money magazine wrote about the hazards of depending on product pushers for college advice:

College Aid: Don’t Take the Bait

Important to Know

Whether your child will receive the maximum financial aid award for which he or she is eligible, will be heavily dependent on your child’s college list.

You may position your income and assets in an effort to obtain more aid, but if the schools your child applies to are stingy, a larger financial aid package could simply include more loans.

How to Maximize Financial Aid Awards

1. Complete the applications.

This might sound like obvious advice but millions of families never complete the Free Application for Federal Student Aid (FAFSA). When applicable, families also need to complete the CSS/Financial Aid PROFILE.

Don’t expect schools to alert you about their financial aid deadlines or notify you if you fail to submit your aid application. These institutions, after all, can potentially save money if you don’t seek financial aid. Without filing a financial aid form, your child can’t receive need-based aid.

College consultants and high school counselors, in particular, might be interested in seeing just how many FAFSA applications are submitted at individual high schools in their area. Here is the federal link to the FAFSA Completion Rate by High School.

2. Don’t include retirement assets on the FAFSA.

The vast majority of colleges and universities don’t care how much money you have tucked away in retirement accounts, such as IRAs, 401(k)s, 403(b)s and SEP-IRAs. You could have millions sitting in retirement accounts and the FAFSA won’t even inquire about this money.

Consequently, you should NOT include retirement assets when completing the FAFSA! Unfortunately, the FAFSA is not clear on this issue. As you can see from the following screenshot of the FAFSA, the aid application inexplicably doesn’t explain that parents and students should not include the value of qualified retirement accounts when asked about cash, savings and investments.

While the PROFILE will ask parents and the student how much money they have invested in retirement accounts, it’s considered rare that a school would lower an aid award because of this.

3. Do not tap into retirement accounts.

Don’t withdraw money from retirement accounts during your base year. Withdrawals from retirement accounts such as traditional IRAs and workplace accounts such as 401(k)s and 403(b)s will be treated as taxable income.

The base year refers to the year that the financial aid applications calculate a student’s financial need. Traditionally, the base year had always been the full calendar year preceding the school year that the family was applying for aid. For instance, 2014 was the base year for students seeking aid for the 2015-2016 school year. Beginning with the upcoming 2017-2018 school year, however, the base year has been pushed back by an additional year so students and parents will be using two-year-old tax returns (2015) when completing the FAFSA. So the base tax year for people applying for aid for the 2017-2018 school year is 2015.

If you pulled the cash out because of a financial emergency, ask the school to disregard it by seeking a professional judgment, but there is no guarantee that this will work.

4. Sink more money into retirement accounts.

If you can swing it financially, it’s a good idea to invest more money into retirement accounts. You will boost your chances of enjoying a comfortable retirement and at the same time you’ll be able to shield this money from financial aid calculations.

Here is something, however, that aggressive retirement savers need to keep in mind:

If you receive a tax deduction for contributing to a retirement plan, such as a 401(k) or a traditional IRA, two years prior to year your child heading to college (prior-prior tax year) and every subsequent year that you file for aid, the financial aid formula will adjust your income upward. The formulas will add back to your income the contribution dollars to you or a spouse’s retirement plan, but this money will no longer be considered an asset for financial aid purposes. This money is considered the parent’s untaxed income.

Parents won’t generate untaxed income, however, if they contribute to a Roth IRA because those contributions are made with after-tax dollars. People who contribute to a Roth don’t receive an upfront tax break like investors, for instance, who sink money into a 401(k) or a traditional IRA.

5. If possible, avoid IRA rollovers.

I would try to avoid rolling a 401(k) or other workplace account into an IRA while you are seeking financial aid. Moving money from a workplace account to an IRA should not impact financial aid at all, but there have been cases where that rollover amount has been added to the parent’s income!

This has been happening when parents have used the federal federal Data Retrieval Tool to update their FAFSA after they have filed their federal income taxes. I am sure some students did not receive aid due to this problem and didn’t even know this was the problem. Two former colleagues of mine at the Los Angeles Times had this happen to them after the wife moved her newspaper 401(k) to an IRA rollover.  The parents had a heck of a time trying to convince American University, where their daughter wanted to attend, that their EFC was vastly inflated because of this federal mistake.

6. Move money out of child’s name.

Financial aid formulas penalize money held in a child’s name more harshly than parents’ assets. Most students don’t have enough assets for this to make a difference. A major exception can be money tucked away in custodial accounts — Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA).

You can close down an UGMA or UTMA and pay any applicable taxes and then move the cash into a custodial 529 college savings account for the child. The FAFSA will treat money in a custodial 529 plan as a parent asset for financial aid purposes. Many PROFILE schools, however, will treat custodial 529 accounts as a child’s asset.

The money from a custodial account can also be used for the benefit of the child before a parent completes any financial aid applications.

Be careful about the timing of shifting money from a custodial account to a custodial 529 account. Liquidating the account can generate capital gains (reportable on the FAFSA and PROFILE) so it’s best to make this move before the first base year.

Keep in mind that if a child has a retirement account, such as a Roth, this money should stay put. It will not hurt a child’s aid chances as long as it remains in the account.

7. Don’t assume trusts funds are an answer.

You might assume that a trust fund will protect parent and/or student assets from financial aid formulas. These funds very rarely do. Trusts funds, which are usually set up for the benefit of the child, will be considered an asset of the student even if he or she doesn’t currently have access to the money.

A trust that can’t be drawn down by an individual can put a family in a real financial bind. If the beneficiary has restricted access to the principal, the trust assets will continue to reduce aid for the child’s entire time in college. In contrast, a parent can deplete the money in a 529 so eventually there would be no assets left to hurt aid.

If the student or parents don’t know a trust exists they can’t report it. This is something grandparents should keep in mind if they are tempted to create trusts for grandchildren.

8. Have a child take a gap year.

A family’s EFC will shrink if more than one child is in college at the same time. With two children in college, the parent EFC for a PROFILE school will drop 40%. Consequently, the PROFILE EFC would end up being just 60% of the parent EFC if only one child was in college.

Here is a handy chart that shows you how the number of children in school will reduce an EFC for the federal methodology (FM) and the institutional methodology (IM).

9. Spend child’s money first.

If you end up with assets in the child’s name, spend that money first to cover college costs rather than parent assets. Once the child’s assets are gone, the student’s EFC will drop.

10. Explore whether you qualify for the simplified means test.

If the parents’ adjusted gross income is less than $50,000 and meets certain other criteria, including being eligible to file the IRS Form 1040A or 1040 EZ, they do not have to share their non-retirement assets on the FAFSA.

This could be a huge boon to parents who have lost their jobs or are underemployed, but have accumulated a significant nest egg over the years. It can also be helpful for a divorced parent who has assets from a divorce settlement, but who does not have a good-paying job.

11. Apply for aid early.

It’s best to apply for financial aid as early as possible. There is essentially no deadline for seeking federal aid – the application period for the 2017-2018 school year extends from Oct 1, 2016 to June 30, 2017. States, however, have much shorter deadlines for their aid and some dispense money on a first-come, first-served basis.

The FAFSA and the CSS/Financial Aid PROFILE for the 2017-2018 school year were available beginning October 1, 2016.

12. Pay attention to college aid deadlines.

Don’t give a school an excuse not to award your child financial aid. Make sure that you meet the aid deadlines for each school. If your child is applying Early Decision or Early Action, it’s likely that the schools will want you to complete your aid application in the fall of your child’s senior year in college.

13. Know the rules for divorce and separation.

Make sure the right parent files for financial aid – it can make a significant difference in how much aid the child receives. I cover this issue in another lesson entitled, Divorce, Separation and Financial Aid.

14. Understand your financial aid award letter.

Many financial aid awards are misleading. Some schools intentionally make their letters confusing, such as making loans appear to be grants, in the hopes that parents won’t appreciate how poor the awards are. You’ll learn more about evaluating financial aid letters in the module entitled, Financial Aid Awards/Tax Credits.

15. Don’t hide your home equity.

Most schools don’t even inquire about the value of your house, which makes your home equity irrelevant if you are only filing the FAFSA. PROFILE schools will inquire about home equity.

You can read more about financial aid and home equity in an earlier lesson within this module as well as by reading these two blog posts:

Will Your Home Equity Hurt Financial Aid Chances?  A Case Study

Is It Okay to Hide Home Equity?

16. File the FAFSA on a bad day for stocks.

You are expected to report the value of your assets on the day you file the FAFSA  and PROFILE so it’s better to submit the applications on a day when the stock market has performed poorly or you have paid your bills. For financial aid purposes, the lower the account balance, the better.

The family should preserve documentation of the value of the assets, such as monthly statements or printouts, from the web site of the bank or brokerage firm.

And, by the way, if the financial markets crash after you have filed the aid applications, you can’t go back and update them with your assets’ lower value.

17. Be careful with grandparent contributions.

Grandparents can hurt financial aid chances if they aren’t strategic when helping out with college costs. You can find out more by reading the lesson entitled: Grandparent Savings and Financial Aid.

Let's Connect

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  1. I have this same question Ilya posted in 2015 but I don’t see a reply. Do you know, Lynn?

    Thank you!


    “Ilya Oshman November 10, 2015 at 11:23 pm #
    If an EFC is $100,000 with one child in college and $45,000 with three children in college (IM), does that mean that for each child a college will expect a family to contribute $15,000? Thank you for clarifying.

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  2. Hi Lynn,

    Two questions.

    Question #1: Do schools that use the CSS Profile consider retirement accounts as assets when figuring aid? If not, why do they ask for that?

    I want to be sure it should be a top priority to contribute to my SEP-IRA again this year. I left a job in the spring, have been freelancing since then, and my income has gone way down.

    Thank you!


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      Hi Nancy,

      Schools are not supposed to consider retirement accounts, but the explanation that I get regarding why they do is to get a better picture of the family’s financial strength.

      Money you put into your SEP-IRA shouldn’t be counted as an asset, but the IRA contributions that you make in a base year will be added back into your income when filling out the Profile or the FAFSA.

      Lynn O.

  3. Lynn,

    Two questions:

    1) Can you clarify if small businesses are included? We created an LLC and through the LLC bought the property next door to us. We have a rental house and board horses on it. We don’t have any assets on it that we could sell other than the house and we are upside down on the house. If I include the net negative value of the property (the value less our mortgage), it would offset some of our assets but I thought I shouldn’t include that since it is our small business. The rental income and horse boarding income is already included in my AGI.

    2) I’m considering not doing the FAFSA this year at all because I have done the EFC calculation on the College Board site and even at the most expensive schools that meet 100% need, we do not qualify for aid. I have also done the net price calculators for Reed and Occidental and they also show that we wouldn’t qualify for aid. Since my daughter who is currently a senior is doing a gap year, it is probably irrelevant anyway unless we figure out a way to get some money and it would be held for her if she gets approved for a deferment. I have heard mixed thoughts on not doing the FAFSA. Some people have said you should fill it out anyway, because some schools look at it for merit aid. I don’t understand that idea.

    We have a second daughter who is currently a sophomore, so we expect to have two in college for three years.

    Thank you.

    1. Post

      Hi Lisa,

      If you have run the net price calculators for schools and you don’t qualify for need-based aid, you could decide not to submit the Profile and the FAFSA. You would only file the FAFSA if you wanted to borrow through the federal college loan programs.

      If your daughter applies and then wants to take a gap year, you would have to ask the college she wants to attend for a deferral. You would probably be able to keep a merit scholarship going that route, but you would have to ask.

      Some schools require a FAFSA for a merit award, but I have only run across one – Georgia Tech. It’s easy enough to ask a school if it’s required.

      As for the small business, just because you created an LLC doesn’t make it a business. This is a tricky topic of what is considered a business for financial aid purposes. I would consult an expert on this if you decide to file the Profile. I would recommend Paula Bishop, a CPA, in Bellevue, WA, who is excellent. FYI, you can’t deduct the negative value of a property to offset your assets.

      Lynn O.

  4. Hi Lynn,
    I’m sorry if this is a stupid question. I am stuck on the “make sure the FAFSA is properly completed” comment. The comment above about trust funds- not knowing if one exists etc. You are talking actual monetary assets, correct? In a will that names a trust with $1 it does not need to be noted. (To further clarify- the $1 is there to create the trust but at a future date an insurance policy’s potential assets, in case of death, are attached to it. The child is simple a beneficiary.)

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  5. Lynn
    Two questions:
    1) Thanks so much for including this comment. “Keep in mind that if a child has a retirement account, such as a Roth, this money should stay put. It will not hurt a child’s aid chances as long as it remains in the account.” My son has a Vanguard Roth IRA that is an UTMA account….. I was looking for a way to teach him about investing and that is what we had chosen. I was thinking it was going to count against him because it was an UTMA. Please confirm that I’m interpreting this correctly.

    2) Before 529s became so well known, we invested in Education Savings Accounts and have about $5K per child in this type of account. Are these treated the same as 529s when it comes to aid?


    1. Hi Laura,

      I think by Education Savings Account that you are referring to is a Coverdell. These Coverdell accounts are treated like parent assets just like a 529 account. So the FAFSA would assess the money at up to 5.64% and the PROFILE at up to 5%.

      I am puzzled by your child’s Roth IRA account. It would have been impossible to transfer an UTMA account to a Roth IRA since the Roth must be funded with a child’s earned income. I would contact Vanguard and clarify what this account is. I think your Roth just has your name on it with your son’s because he is a minor – that is different from a UTMA. When I set up Roth IRAs for my own kids when they were teenagers I had to also put my name on the account because they were minors, but that didn’t make it a custodial account.

      Lynn O.

  6. Really interesting comment about gap years. I have seen the popularity of these increasing; however, families usually speak to how the student can obtain a job during this time and make more money with which to pay for college. Sounds like this could hurt when they see how much student dollars are assessed. If they have other children however, a gap year to bring them closer could really help them.

    Correct me if I am wrong but I believe #11 above needs to be updated with the new FAFSA timeline which applies to rising seniors.

  7. Lynn,

    If an EFC is $100,000 with one child in college and $45,000 with three children in college (IM), does that mean that for each child a college will expect a family to contribute $15,000? Thank you for clarifying.