Positioning Your Income/Assets to Enhance Financial Aid Eligibility

What does it mean to enhance your financial aid eligibility?

      If you qualify for federal financial aid, there are a number of strategies you can try to implement to enhance the amount of aid your child will receive when you apply for financial aid. The idea is to lower your expected family contribution (EFC), which in turn raises your child's aid eligibility.

      It is important to note that these strategies are perfectly legal and are not in any way meant to undermine the federal financial aid process. These strategies simply examine the federal methodology and take advantage of its rules regarding which family assets and income are included in determining a student's financial aid eligibility.

      There are a number of steps you can take to reduce your adjusted gross income (AGI) under the federal methodology for determining financial aid. The lower your AGI, the less money you will be expected to contribute toward college costs and the higher your child's aid eligibility.

      Remember, you apply for financial aid each year. Thus you should consider the following strategies for each of the years you will be applying for aid, not just for the initial application.

Time the receipt of discretionary income to avoid the base year

       Your income in the base year will directly affect your child's financial aid eligibility in the corresponding academic year. Although it is highly unlikely that you will be able to defer your weekly (or monthly) paycheck, it may be possible to defer other types of discretionary income beyond the base year. For example, if possible, you should try to:

• Defer receiving employment bonuses until after December 31 of the base year.
• Avoid selling investments that will have taxable capital gains or interest, such as mutual funds, stocks, or savings bonds, until after December 31 of the base year. To avoid taking an untimely distribution from an investment that is earning a favorable rate of return, use the investment as collateral for a low-interest loan instead.
• Sell investments that can be taken at a loss during the base year, as long as the investments are not expected to recover.
• Avoid pension and IRA distributions in the base year.
• If you are on an expense account, ask your employer to reimburse you directly so that any reimbursement amounts do not artificially inflate your income.

Pay all federal and state income taxes due during the base year

      Paying all federal and state income taxes due during the base year is advantageous for two reasons: it reduces the amount of available cash on hand, and you can deduct the total amount of federal and state taxes you pay during the base year on the FAFSA.

Leverage student income protection allowance.

      For the academic year 2015/2016, the first $6,310 of income a student earns is not considered in determining a child's total income. This is known as the student's income protection allowance. However, everything a student earns beyond the allowance is assessed at 50 percent for financial aid purposes. In other words, the federal government expects your child to contribute 50 percent of all income earned over the allowance (after taxes).

      To avoid this result, parents may want to consider having their children perform volunteer work once their kids reach the allowance limit.