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How to Improve Your Child's Chances for Financial Aid

Nov 2, 2009 Jennifer Williamson, Distance Columnist | 0 Comments

Today’s tough economy is making it more difficult for parents to pay for college—and banks have been tightening their requirements for private loans, making it more difficult than ever for students to secure funding for their education.  That’s why it’s crucial for every parent to know how to maximize their chances of getting a good deal when it comes to financial aid.  Here are a few tips on how to improve your child’s eligibility for scholarships and low-interest public loans—and how to save in the meantime.

Know how your income is assessed

Between 0% and 5.64% of parents’ income is considered “available” to pay for college—so that means each $10,000 in your assets lessens the amount of your financial aid eligibility by $564.  If you know how your assets are judged, you may be able to move some money around to make you better qualified for aid.

Money and Mortarboard

The warning signs that you’re about to be
fired can be subtle.

Look into 529 plans

529 savings accounts are state-sponsored plans that allow you to make contributions toward your child’s college tuition without being subject to Federal or state income taxes. In some states, you can claim a tax deduction for the contributions you make as well. And if one child doesn’t go to college, you can apply the funds to tuition for another family member without incurring financial penalties.

There are drawbacks, however—for example, if you have more money in the fund than you need to pay for college, you may have to pay taxes on that money. In addition, withdrawal rules can be stringent—if you withdraw more than is needed for the child’s college expenses, it could be taxed as unearned income for the student.

Keep most financial assets under the parents’ names

Most student aid—in the form of both scholarships and low-interest loans—is given out based on the student’s financial need. The parents’ assets are used to judge how much need each student has, and how much aid they’re eligible for. However, if a child has significant assets in her own name, schools will expect a higher percentage of those assets as tuition contributions than they would be if they were under a parent’s name. Under current rules, students are expected to contribute 25% to 35% of their assets each year. So if your child has a savings account or other funds in his or her name, transfer it to your name before applying for aid.

Retirement accounts aren’t counted as income

Your 401(k) and other retirement accounts—except Roth IRA’s—are not counted as income when being assessed for student aid. As a result, it’s not a good idea to cash out on any retirement accounts while you’re being assessed. You can actually lower the amount of income that shows up on your income record by making larger contributions to a retirement plan before you apply for student aid for your child.

Avoid large tuition gifts

If a nonfamily member wants to give the gift of paying directly for some of your child’s tuition, be careful how it’s done. A direct tuition payment to the college is considered the equivalent of a scholarship—the student’s financial aid eligibility will be reduced by every dollar paid directly.  So if your child’s godparent makes a $5,000 contribution directly to the school, it will reduce your child’s aid by $5,000.

It’s not easy to save for college—especially since college tuition isn’t abating to match tough economic conditions, and private loans are more difficult to open than in years past. Every family needs to know how to improve their chances of getting the most financial aid possible.  By opening a 529 account, you can save tax-free without having the savings counted toward your aid eligibility. You can also boost your chances by putting more money into retirement accounts, avoiding large tuition gifts from nonfamily members, and putting all financial assets under the parents’ names instead of the child’s. By taking these steps, you should be able to increase the amount of financial aid your child is eligible for.

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