There are times when you want to make yourself look poorer -- legally, of course. One of those times? When you are helping your children apply for financial aid for their college education.
College tuitions and fees are not falling. According to CollegeBoard.org, over the last 20 years (2008-09 and 2018-19) published in-state tuition and fees at public four-year institutions increased at an average rate of 3.1 percent per year, beyond inflation.
The College Board estimates that students who enrolled in a private university for 2018-2019 can expect to pay $48,150 in tuition, fees and room and board for that school year. Those who enrolled in an in-state public university for 2018-2019 can expect to pay $21,370.
Those are sobering costs. The good news? There is a wide variety of financial aid available to help incoming students pay for the escalating cost of a college education.
Parents will want to take any legal means necessary to help boost the amount of financial aid available to their children. That often involves sheltering assets and saving money in the right way.
Fortunately, there are several steps that parents can take to maximize the financial aid that their children will receive.
The key is for parents to arrange their finances in such a way to take advantage of the formula that goes into figuring how much aid is available to every incoming college student.
It is essential here for parents to remain honest. Those who try to hide their income may face penalties from the federal government. The government wants to disburse money to those students who genuinely need it. Families that lie about their finances skew this process.
However, there are plenty of perfectly legal steps that parents can take to boost the odds that their children will receive a healthy amount of federal financial aid.
First, parents should always save money in their names, not in the names of their children. That is because the federal financial aid formula uses a smaller percentage of parents' savings in determining how financially well-off students are. Parents who make the mistake of saving money for college in their children's names can cost their sons and daughters a significant amount of aid.
Parents can solve this problem by investing in prepaid or college savings plans in their names. They can do the same by investing their money in a Coverdell Education Savings Account.
Next, parents should pay off as much of their consumer debt -- including credit card bills and auto loans -- as possible. That is because the federal financial aid formula does not include consumer debt. That is unfortunate; many families are struggling with consumer debt. They would undoubtedly qualify for more student financial aid if the formula included this debt. As the formula stands today, though, it makes sense for families to funnel income away from their savings and use it instead to pay down consumer debt. That leaves families with fewer savings and will help them qualify for more student financial aid. It also has the added benefit of reducing consumer debt that comes with potentially high interest rates.
Parents who want to boost their children's financial aid should also consider going back to school -- if that is in their long-term plans -- at the same time their children are starting their college careers. Traditionally, children receive more financial aid if their parents are also paying for their college education. It is important to note, though that this strategy is losing some of its effectiveness as the student-aid formula changes.
Also, those parents who are considering making a big purchase, such as a high-end computer or home-theater system, might make that buy with their savings before their children apply for financial aid. The big purchase will eliminate some of the cash in parents' savings accounts, making them look more in need of financial aid.
Parents can reduce their income by maxing out their contributions to their employer's 401(k) plan or by investing as much as possible into their IRAs. Again, this has the effect of reducing parents' incomes, increasing the odds that their children will qualify for more financial aid. This step also comes with a financial bonus. By investing as much as possible into their retirement accounts, parents, while helping their children qualify for more aid, will also increase their chances of enjoying a financially secure retirement.
Filing for Financial Aid
When it is time to file for financial aid, parents should help their children fill out the Free Application for Federal Student Aid, better known as FAFSA. The good news? Parents can complete this form online at the home page of Federal Student Aid.
The bad news? The form is a bit lengthy. Also, parents might be required to provide documents such as copies of their income tax returns and bank statements to back up their financial claims.
Fortunately, any parents who have ever applied for a mortgage loan will be familiar with the drill of documenting their income. The FAFSA application, despite its length, is no more complicated than a typical mortgage application.
The FAFSA will tell parents how much federal financial aid is available to their children. Parents should be careful not to miss the deadlines for filling out these forms. This deadline changes year by year, but for the 2019-2020 academic year, parents have to apply for federal financial aid -- and complete FAFSA -- between Jan. 1 of 2019 and June 30 of 2019.
It is best, though, for parents to fill out the application as early as possible. Doing so will give them more time to prepare if their children do not receive as much financial aid as expected. It will also help their children qualify for a few federal student aid programs that operate on a first-come, first-served basis.
Types of Financial Aid
The best types of student loans are federal ones. That is because these loans come with the lowest interest rates and the most favorable loan terms. For instance, federal loans often give college graduates the option to delay repayment if they are struggling financially or have not been able to find a job. Some graduates might even be able to waive a portion of their student loan debt.
Students who do not qualify for enough federal student loan dollars, though, do have an option: They can apply for private student loans. These loans are not based on financial need. They also don't come with as favorable terms. They come with higher interest rates and may require a quicker repayment. It is why parents should always help their children fill out their FAFSA form: Federal student loans are a far more attractive option that private ones.
Some students might also qualify for the federal work-study program. This needs-based program allows students to work part-time jobs to pay for their college education. Often, the work available will be related to the field that students are studying. Other times, the work comes in the form of community service.
Parents struggling with saving for their children's college education should start learning about federal and private student aid as early as possible. It is the only way for them to boost their odds of maximizing the amount of financial aid that their children receive.