By: Summit Financial Group, Inc.
Families miss out on thousands of dollars each year because they neglect proper planning strategies for their financial aid application. That’s right, it is not enough simply to complete the FAFSA. If you want to maximize the amount of aid you are eligible to receive, it requires planning.
To be most effective, income strategies require planning the in the years before your child graduates high school. Your child’s financial aid award package for their freshman year of college is based on financial data from the prior year. For example, seniors graduating in 2007 will be using 2006 information to complete their Free Application for Federal Student Aid (FAFSA). To be most effective, their parents should have begun income strategies in during the 2005 reporting year. If you are the parent of a freshman, sophomore or junior, don’t wait! Begin using these strategies today.
Avoid large bonuses in the base year. Please don’t misunderstand, we are not suggesting turning down money! However, if you have the option to defer additional income into the next year, this is to your advantage as you will not be required to report this income on the FAFSA.
Avoid tax refunds. Paying more taxes than you owe in a given year will ultimately result in a refund the following year. Refunds are viewed as income. Additional income raises your EFC and will reduce the amount of money you are eligible for in the form of financial aid. Take note of the levels of taxes currently withheld and make any adjustments necessary. You may not get a bid refund next year, but you’ll thank us when you get more financial aid!
Avoid selling stocks. Sales of stock resulting in capital gains will be treated as income. This again will raise your EFC and reduce the amount of money you are eligible for in the form of financial aid. This is important from now until your child is past April of their junior year in college.
Dividends are income too. Although their taxation is more favorable than ordinary income, the impact on FAFSA is the same.
If you think these rules seem harsh or unfair, take heart. If you have assets with embedded losses, you may offset other gains and up to $3,000 of ordinary income from capital losses. Every reduction of income should be seen as a chance for more financial aid.
Families with incomes near $50,000 who file a 1040ez or 1040a may qualify for the simplified needs test. Unlike the traditional approach (which adds back in the untaxed income and retirement contributions) the simplified needs test uses adjusted gross income and excludes assets entirely
When your child’s income exceeds $2,550 (after taxes), it becomes one of the most detrimental items to impact your financial aid package. Children are allowed to earn a nominal amount that is classified as “income protected”. Once they exceed that income protection allowance (IPA), 50% of the income over their IPA goes directly to the family EFC.
A child’s savings account will also negatively impact your financial aid package. 35% of every dollar they save will increase EFC. For example, a dollar of student income earned above IPA, can increase EFC by as much as $.85, assuming that dollar was saved. If your family is likely to qualify for financial aid, you may be financially better off keeping your child’s earnings and savings below the threshold. Instead of working for income, children should consider using their time to do volunteer work or participating in other activities that will enhance their college applications.
For questions, contact Scott at 513-891-6050 or tscott@summitgrp.com