Financial Aid: Know the Rules of the Game

You would never jump into a game and wager thousands of dollars without first knowing the rules.  And yet, every year many parents do just that as they embark on the process of seeking financial aid for college costs.  The truth is if more parents understood how the information on the Free Application for Federal Student Aid (FAFSA) is analyzed, they would take steps to place themselves in the most favorable light.  Strategic positioning can really pay off if you know how the game is played.  Here’s what you need to know:

  1. How your data will be assessed:  The formula FAFSA uses to determine the Expected Family Contribution (EFC) considers the parent’s income, savings and investment assets (excluding retirement accounts and the primary residence), as well as the student’s assets and income.  On average, parents are expected to contribute about 5.6% of their assets and between 22% and 47% of their income (with a $20,000-$60,000 allowance based on their age) towards college costs.  Students are expected to contribute roughly 20% of their assets and 50% of their income (with a $3,000 allowance) towards the tuition bill.  Switching assets into a child’s name would not be a helpful strategy.  If your child is employed, consider opening a Roth IRA, as retirement assets are not considered assets.
  2. What time fame you are working with:  The FAFSA form is submitted during the student’s senior year in high school, based on data from the previous tax year (i.e., January 1 of the student’s junior year through December 31 of senior year), also called the Base Year.  Strategies that can be employed to reduce income or assets before the assessment period could prove very beneficial (e.g., sell non-retirement assets before the Base Year and use this money to fund IRA or Roth IRA accounts;  speak with your employer about receiving your bonus prior to the Base Year, or delay the bonus until the following year).  In addition, avoid liquidating any investment assets during the Base Year, as that inflow of cash would be considered as income.
  3. What counts against you:  Non-retirement assets are considered available funds, even though you may be carrying high credit card debt.  Prior to January 1 of your child’s junior year, consider taking some of your non-retirement savings or investments and using them toward reducing or eliminating this debt.
  4. What works in your favor: Roth IRAs, IRAs, employer-sponsored retirement accounts, Coverdell accounts, 529 plans, annuities, or the cash value of life insurance policies are not considered as assets for the purposes of FAFSA.  Prior to the Base Year, consider moving non-retirement assets (which FAFSA does count as assets) into one or more of these types of accounts.   

Remember, if your child is looking at more elite, private schools, the CSS form will need to be completed as well.  This formula assesses parents and students differently, and requires more of a contribution from both the parents and student.

After you submit the FAFSA form, the matter is out of your hands.  But, what you do beforehand, when the matter is in your hands, can be critical to the outcome.  Being aware of what you are up against may change your approach to the game and, hopefully, with a little planning, may help reduce the tuition bills.

Authored by: Anthony Dina Isola

Dina Isola, President of Real$martica, Inc. - COO and Director of Investor Relations, ATI Investment Consulting, Inc. Following a successful career in marketing communications in the financial industry, Dina and her husband, Anthony, founded a registered investment advisory firm, ATI Investment Consulting, Inc., and ultimately the idea for the educational company Real$martica, Inc. was born. In dealing with investors and hearing their concerns, she spearheaded ATI’s investor education efforts, coordinating with local libraries and townships to offer free investor education seminars. She has volunteered her time, writing financial articles and has conducted investor education classes geared to family financial matters. She is President of Real$martica, Inc. and is COO and Director of Investor Relations for ATI Investment Consulting, Inc. and personally handles all communications for both firms. She is active in her local business community and serves on the Brookhaven Business Advisory Council and is a member of the Three Village Chamber of Commerce. She earned a BA in English and Communications from Fairfield University. She is a registered investment adviser, and is a licensedreal estate salesperson in New York State.  Prior to founding Real$martica, Inc. she was a Vice President in charge of marketing communications for a privately-held investment management company in New York City.  She has worked in the financial industry since 1987. thumb_tony_isolasAnthony T. Isola,  President, ATI Investment Consulting, Inc. Anthony has married his passions, investing and education. He is President and founder of ATI Investment Consulting, Inc. (“ATI”) a registered investment advisory firm. His vast knowledge in matters of finance brings a well-rounded perspective to all that he does. As an educator, he has a natural ability to explain complicated economic and financial concepts and make the practical application of these concepts come to life. In working with clients, he recognized how overwhelming building a financial plan can be, especially when most investors are vulnerable due to their ignorance on financial matters. He prides himself on empowering investors to understand how to look out for their interests and not fall prey to financial arrangements that will take them off goal.  In addition to managing assets for clients, he has counseled investors on social security benefits, retirement income assessments, and college planning. He teaches history at Plainview Old Bethpage Middle School and oversees students’ participation in The Stock Market Game and financial literacy for the Plainview Old-Bethpage Central School District. He has taught financial related courses to children, parents and staff members in the district, as well as to Long Island residents. He holds a New York State Permanent Certification (in Social Studies). He earned a BA degree in Economics from Boston University and a MS degree in Secondary Education from Hofstra.  Prior to teaching, he worked as a foreign currency trader in New York City for large international banks.

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