Parents of high school Freshmen, Sophomores, and Juniors may not realize that college aid eligibility is not just the concern of the current batch of Seniors applying right now (application season opened August 1). There are things to do in the financial planning arena—right now—that can increase the financial support coming to your child and perhaps snag advantages current applicants neglected! This is where a financial planner with college planning expertise can add huge value.
Family Income & Financial Aid Eligibility
After student income, parental income has the largest impact on federal financial aid eligibility. But if you only come to me at application time, we can no longer do some of the things we could have done to lower your assessed household income. That’s because financial aid applications assess your income from the prior-prior year (that would be 2022 for today’s applicants for the 2024 school year, or the year the student enters their Junior year). By the time your student is an applying Senior, it’s too late.
Ideally, we’re starting advanced late-stage college planning in a student’s Freshman or Sophomore year. That way, as we enter the first “base year” (an assessed tax year), we’re already prepared to implement income-related strategies. What can be done? A lot. If I were counseling you, here are just a couple of the many strategies I might suggest:
Maximize your retirement saving in base years, even over and above what your financial plan suggests, to lower assessed income. We can always dial back saving before and after to compensate and free up needed cash flow.
If at all possible, avoid asset sales that would generate large capital gains in base years.
Now, obviously, everything is a tradeoff; everything needs to fit with your financial plans and be appropriate for your unique situation. For example, don’t sock so much away in your 401(k) that you can’t meet your living expenses just to manipulate the FAFSA! But there’s a mix of smart planning moves that, if not taken to unreasonable extremes, can still make a big difference.
Student Income & Financial Aid Eligibility
The same goes for student income, which has the highest negative impact on financial aid. The general advice is to make sure the student doesn’t earn more than the Federal Methodology* allowance amount (currently $7,600) in a base year. But if you didn’t know about this rule or that the Junior year matters so much, it may be too late. I educate my clients about financial aid eligibility well before the first base year so we can address student income.
Assets & Financial Aid Eligibility
Interestingly, assets are assessed as of the day you file for financial aid, not in the prior-prior year like income. Yet we may need years to plan around assets. There may be things we need to do in the years running up to a base year to optimize assets for financial aid eligibility.
The Earlier the Planning Starts, the Better
Getting down to brass tacks, the earlier you start thinking about and planning for financial aid, the better. College counselors are great at helping your child learn about schools, understand where they might be accepted, and fill out applications, but they cannot provide financial advice. They do not know your family’s intimate financial details. And they may not even know the nitty-gritty details of how the new Student Aid Index (formerly the Expected Family Contribution) is calculated or how schools manage their businesses so you know what they will (or can) offer your child. A financial planner with deep knowledge of the Federal Methodology, the other methodologies typically used by private schools, and what actions can materially impact financial aid is the key resource you need.*
Start with a free consultation. Even if you’re not ready for comprehensive financial planning, we can work together on a project basis just on enhancing financial aid eligibility and shopping for college. Click the scheduling link below to get started:
Eric R. Figueroa, CFP®
I am a Folsom, CA, fee-only wealth manager serving the Greater Sacramento area, California Gold Country, and the nation virtually. I offer financial planning and investment management, specializing in impact investing and personalized values-based investing.
*Note, most private schools use the Institutional Methodology (IM) or Consensus Methodology (CM), which, while much more accommodating of special circumstances, are much less affected by planning around assets and income. So if your child is pursuing an Ivy League school, for example, the impact of some of the planning ideas in my toolkit, or actions I may caution against, is limited or not relevant at all. That said, in some cases, these private methodologies will be more generous than FAFSA. For example, the IM’s CSS profile takes how many children you have in college at the same time into account, whereas the new FAFSA does not and inherently penalizes families with college-bound children with short age gaps.
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