, we talked about easy-to-make mistakes on the federal financial aid application for college.
Now let's cover some last-minute money moves parents can make to improve the family's chances of qualifying for more aid, be it loans or grants.
First, some throat-clearing.
These strategies might not help much. They might not help at all.
They'll be of more help to parents whose students aren't months away from going to college -- parents of high school freshmen or sophomores, for example.
That's when "you have plenty of time to reposition your assets," said
, a certified public accountant in Portland who specializes in college planning. "You have plenty of time to do tax planning to bring your income down."
It helps to understand how the Free Application for Federal Student Aid counts assets and income. It does so differently for parents and students.
determines your expected family contribution to college, or your EFC. The higher your EFC, the less aid you'll get, and the more you'll pay out-of-pocket.
FAFSA counts 20 percent of a student's assets toward EFC. It takes only 5.6 percent of parents' assets. That's after it allows parents to shelter a certain amount of assets for retirement, more the older you get. If the older parent is 44, the couple can protect $40,300,
. If the older is 62, the couple can shelter $65,000. Single parents get to shelter much less -- only about one-third as much as couples.
Even so, it makes sense to have few assets in the student's name. Though even that isn't any guarantee, as you'll soon see.
More help
See how
about filling out the FAFSA.
Also, read Brent’s recent review of “
.”
When it comes to income, FAFSA allows students to keep the first $6,000 each year. After that, FAFSA counts 50 percent of a student's income toward the EFC.
Parents also get an income allowance. After that, FAFSA expects anywhere from 22 percent to 47 percent of their income to go toward their EFC. The more you earn, the higher the assessment rate.
One more thing: When figuring income, FAFSA requires you to include any tax-deferred contributions you made to retirement plans, including traditional IRAs and 401(k)s. You don't, however, have to add back contributions you made to a
; those contributions aren't tax deductible.
All that in mind, let's look at some last-minute tips.
Pay for big-ticket items before you file that FAFSA.
Make those car repairs or buy that car or appliance before you submit your form. It lowers the amount you report in your savings or brokerage account that can count toward your EFC.
"It's moving money out of an assessable asset to an unassessable asset," says Gary Carpenter, founder of the
, an organization of accountants and advisers who specialize in college planning.
Students: Contribute to a Roth IRA.
You'll soon see why some college-planning specialists consider Roths their first choice for college savings.
As long as you earned income at a job in 2011, you can contribute to a Roth. You can deposit up to $5,000 or your total earned income, whichever's less.
Roths act as financial-aid shelters because FAFSA doesn't consider retirement plans to be investment assets. What's more, unlike with traditional IRAs or 401(k)s, you don't have to add Roth contributions back to the income you report on the FAFSA.
Best of all, you can always withdraw contributions from a Roth to pay for nearly all college expenses without paying a 10 percent early-withdrawal penalty, even if you're under 59 1/2. You can use such Roth withdrawals to pay tuition for yourself, your child or your spouse. You can also pay for room and board of students who attend at least half time.
You can even use Roth money to pay for books, fees, supplies and equipment required for enrollment.
You have until April 17 to make a Roth contribution for the 2011 tax year. So, even if you've spent all the money you've earned from last summer's job, you can still contribute to your Roth. Your parents or grandparents can even gift you the money, provided they've not already gifted you $13,000 and are risking gift taxes.
"All a student needs to fund a Roth is earned income," said Susan Yang, a certified public accountant and college planning specialist in Portland. "But the money that actually goes into a Roth can come from a gift."
Here's how this move might help.
Also,
FAFSA expects 20 percent of any money in a student's savings account to be spent on school. But it doesn't assess money in a Roth at all. So essentially, that $5,000 Roth contribution also could free up another $1,000 in aid.
Parents: Contribute to a Roth.
Each parent over age 50 can contribute $6,000 to their Roth for both 2011 and for 2012. That's $24,000 of assets and income potentially sheltered from FAFSA. At FAFSA's 5.64 percent rate, that could get you an extra $1,353 in financial aid.
Spend down custodial accounts.
Assets held inside Uniform Transfers to Minors Act or Uniform Gifts to Minors Act accounts are owned by the child. FAFSA, therefore, counts 20 percent of them toward the EFC.
But nothing prevents custodians from spending money on the child's behalf, so long as it's not spent on basic "parental obligations" such as food, clothing, medical care and shelter.
SAT prep classes? Overseas school programs? Piano lessons? All could be paid for using custodial account money. All could also help a student's college-entrance essay.
Transfer custodial account to a 529 plan.
FAFSA no longer counts 529 plans as an asset of the child. They're the parents', as long as the student is their dependent. That means FAFSA assesses them at the lower parents' rate.
Be careful, though, of unintended consequences of such transfers. If the uniform transfers or uniform gifts account contains stocks or bonds, they will have to be sold; 529 accounts only take cash. The sales could produce capital gains and tax consequences.
Such gains would also be counted by FAFSA as income to the student, which could actually raise the student's EFC, Carpenter notes. So think through this move carefully.
Prepare for sticker shock.
"It's almost always true that the government calculation of what a family can afford to pay for college is far beyond what is reasonable for most families to pay out of their current income," said Carol Wagar, a certified public accountant with EmSpring College Solutions in Yakima. "The bottom line is that it is primarily a family's responsibility to pay for college, not the federal government. Families need to start planning and saving for college far in advance."
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