In addition, other assets like life insurance and trusts may have a series of transaction or maintenance fees that may be charged to transfer the assets. For instance, some families move a student assets into a custodial version of a college savings plan so the funds are reported in the parents assets, not the students.
Just be aware that in most cases, such adjustments may have little to no impact on federal and state grant eligibility. However, it may make a difference for need-based grants from your college. Colleen Krumwiede. Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education.
She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college. Recent Posts. Thank you for subscribing to the Good Math Blog. We will send periodic emails with the latest posts. LOG IN. Understand the Snapshot of Your Family's Assets. If you withdraw too much money from your pension, or withdraw them before the financial aid application is filed, you will have converted them into an included asset.
If both members of a married couple have earned income, but one falls below the income threshold for filing an income tax return and the other falls above the threshold, it may be beneficial for the member with income above the threshold to file as married filing separate. This will allow the other member to not file a return.
This yields a lower AGI. The risks, however, often outweigh the benefits. Such a transfer of assets will result in a reduction in eligibility for financial aid, and the child is not obligated to spend the money on educational expenses.
But the need analysis formulas assume that the child contributes a much greater portion of his or her assets and income than the parents, with the result that such tax-sheltering strategies often significantly reduce eligibility for financial aid.
The College Cost Reduction and Access Act of changed the treatment of custodial versions of qualified tuition accounts, like college savings plans, prepaid tuition plans and Coverdell education savings accounts.
Specifically, for a custodial account to be counted as a parent asset instead of a student asset, all of the following must be true:. Before filing the FAFSA, the parent should convert the asset by liquidating it, as contributions must be in cash into the custodial version of a college savings plan, prepaid tuition plan, or Coverdell ESA. The money will then be treated as a parent asset on the FAFSA even though it is still owned by the student. Many need analysis formulas divide the parent contribution among all children in college.
Since there has been a history of fraud in this area, you will have to convince the financial aid administrator that you are genuine. The student is also counted, regardless of where the student gets his or her support. For example, if the parents anticipate needing a new car, a new furnace or a new roof, spending the money sooner may increase eligibility for need-based financial aid.
Of course, this strategy should be used only for expenses that the parents were planning on spending anyway. If the student is a dependent student, moving the money into a custodial plan account will cause it to be reported as a parent asset on the FAFSA. For example, suppose the student will need a computer or car for college.
Sheltering an asset may require selling the asset, which can result in capital gains. One workaround is to offset the capital gains with losses.
Some financial aid administrators will infer a ballpark figure for the assets based on the interest and dividends and question if the reported assets are much lower than this figure. The applicant should be prepared to address these questions by providing documentation of the change in assets, such as showing how the assets were used to pay down debt. If the student will graduate in four years, then distributions on or after January 1 of the sophomore year in college will not affect eligibility for need-based financial aid.
Another option is to wait until after graduation to take a tax-free return of contributions to pay down debt. Often, family income dominates the calculation of the EFC.
A high-income student might still not qualify for need-based financial aid even after sheltering assets, except perhaps at the most expensive colleges.
If the student will not qualify for financial aid even after pursuing strategies for increasing eligibility for financial aid , it may be better to pursue tax minimization strategies, such as using the Kiddie Tax and income splitting. Students who do not qualify for financial aid may consider borrowing private student loans to help fill a college savings gap.
By Mark Kantrowitz September 14, The impact of an asset depends on whether it is a student asset or a parent asset. Recommended Articles. How to Increase Your Chances of Qualifying.
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