College Financing Basics: Reduce your contribution, increase aid

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Whether you’ve been saving for Junior’s college education for years or haven’t set aside a dime, when the senior year of high school rolls around there are a few immediate steps you should take to take the sting out of college costs.

First, you’ll want to
become familiar with the way need is determined by
FAFSA forms. There are ways to allocate your assets that will shift your amount of need — and the contributions of outside sources — significantly. Doing that can reduce the amount your family must pony up, called your Expected Family Contribution (EFC), while increasing the amount of aid you can receive.

Often the steps you can take to improve your need are counterintuitive, which is why it’s so important to understand how financial need works.

  • Shifting income and assets. About two years before your child is expected to attend college consider how you might reposition your assets so they’re viewed most favorably on applications for assistance. You may want to consult with a financial planning professional. The amount of aid for which you’re eligible in a given year is determined by the previous year’s earnings. If you have control over the timing of some of your income or capital gains, you may want to try to take that income either two years before enrollment or defer it. Capital gains will count both as income and an asset and could have a devastating effect on aid eligibility. True, deferring it might just make the next year worse, but the rules are always changing. Worry about this year first. Another option is to reduce your reportable assets. It may not seem to make sense to pay off that car loan with the cash or stock when your child is headed off to college, but it may actually be a wise decision. By doing so, you simultaneously reduce your reportable assets, such as cash or stock, and increase your financial need. You don’t have to be paying off debts, though. You can contribute to a charity or go on a vacation. Don’t go overboard, but anything that reduces your reportable assets will help your chances of securing aid.
  • Play the name game. Consider saving for your child’s education in your own name — that bank account you’ve started in junior’s name for college might not be as smart as you think. Your child’s assets aren’t protected the same way as yours, so it’s often not a good idea to save money for college in your child’s name. Having $10,000 in a savings account under your name might be a $560 annual contribution to college costs, but that same account in your child’s name would be a $3,500 contribution. It always pays to save, but be careful how you do it.
  • Get expert advice. Everyone’s situation is different, and when it comes to college, where costs can easily top six figures, it may also be worth your while to hire a financial adviser who can work out a variety of different scenarios for you. Sometimes you can secure a discount on college costs simply by paying in advance.
  • Check alternative payment plans.
    Some colleges offer pre-paid tuition plans in which you can beat annual price increases by paying for all four years in advance. Obviously, it carries some significant risks if your child drops out (though you will likely receive some refund), and it also requires a significant outlay of cash. If you can prepay for a year, you may receive up to a 10 percent discount at some colleges. Beyond that, you may want to see if you can secure a monthly payment plan from the college. Some companies, including
    Tuition Management Systems and
    TuitionPay, offer monthly payment plans.