What Changes To Your Finances Should You Make Before Your Child Leaves For College?
If you've found yourself agonizing over completing the Free Application for Federal Student Aid (FAFSA), required by many college admissions offices as a condition of your teen's enrollment, you may be wondering whether there are any structural changes you can make to your financial picture to improve the odds that your child will be eligible for financial aid. While actively hiding assets or divorcing your spouse to artificially reduce the amount of income deemed available to your child can be considered fraud, there are a number of completely legal and above-board ways to reduce the amount of your expected family contribution, or EFC. Read on to learn more about the types of assets that are factored into the affordability calculation, as well as some steps you can take to improve the odds that your child will qualify for financial aid:
What assets are considered available for your child's college use?
The FAFSA form asks a number of questions about a prospective college student's parents' asset and income levels. This is designed to ensure that new students are on an even playing field and that need-based scholarships and loans are offered to the most impoverished students first; however, some parents criticize this approach as restricting the ability of middle- or upper-middle class students to access low-interest federal student loans.
Based on the income and assets reported on the FAFSA, an expected family contribution is calculated; this number signifies the amount a student's parents can conceivably contribute to his or her education each year. If the EFC is above a certain threshold (or higher than the cost of attendance), it's likely no federal student aid will be offered.
However, not all assets are considered when calculating the EFC, so reducing the number of accounts factored into this calculation can also reduce the EFC. Often, specialized college accounts like 529s are considered the child's asset, rather than the parents', exempting it from the EFC calculation. Real estate holdings can also be carved out of the EFC formula, although income from rental real estate will be considered.
What can you do to reduce your expected family contribution?
Often, reducing your EFC can be as simple as making a few sizeable contributions to your child's 529 account in lieu of funding your IRA. You may also opt to diversify your holdings by entering the world of rental real estate; the value of your real estate assets won't be counted against your child in the same way liquid assets will.
You may want to consult with a wealth management adviser to see whether there are any other opportunities to continue to grow your investments without diminishing your child's ability to qualify for federal student loans or other college aid.