Parents face pitfalls on path to college aid

John W. Schoen Senior producer • Profile • E-mail

With the cost of a year of college now topping $40,000 a year at many private four-year schools, the impact on family budgets has never been greater. And neither has the desire of families to find sources of financial aid to help cover that cost.

As a result, more families are trying to manage their personal finances to maximize their chances of getting aid — in some cases by shifting assets so they are not counted in financial aid formulas.

“Parents are very interested in this,” said Mark Kantrowitz, publisher of FinAid.org, a Web site devoted to financial aid. Each week some 50,000 visitors check out the site’s section on maximizing aid eligibility, he said.

But sorting out the best moves is not easy: In general, there are no hard and fast rules. And while there is nothing wrong with rearranging your finances to increase the chances of getting aid, parents who try too hard to game the system risk being charged with a crime.

“I have seen people lie about assets that they have,” said Ray Loewe, founder of College Money, a New Jersey advisory firm that specializes in college finances. “Basically, if you have an asset and you don’t disclose it, it’s fraud.”

The pot of money that parents of college-bound students are chasing is huge. Last year,  more than $69 billion in federal grants, loans and work-study jobs was awarded to more than 10 million students and families, according to the Department of Education. Billions more were awarded by individual colleges and universities from their own endowments.

To determine eligibility for federal aid, the Free Application For Federal Student Aid, or FAFSA, formula takes into account parent and student income and assets to determine the "expected family contribution" — or how much of the financial burden the family is expected to shoulder. The formula also takes into account how many students are in college — the more siblings enrolled, the greater the chances the family will qualify. And it looks at the age of the oldest parent, giving more consideration to families with a wage-earner closer to retirement.

Shifting assets
The federal formula doesn’t count certain assets — like retirement accounts, annuities or the home equity in a family's primary residence. So one way to increase aid eligibility is to use cash or other investments, which are counted by the formula, to pay down a home mortgage or pay off credit card debt.

“It also makes good sense from a financial planning perspective,” said Kantrowitz, “since your bank account is probably earning only 1 percent, while the mortgage is costing you 6 or 7 percent or more and your credit cards as much as 18 percent.”

Some families may be able to increase their eligibility by using a Roth IRA as a combined retirement/college savings account. In some cases, Roth IRA contributions can be used to pay college expenses without incurring taxes or penalties.

And many families are better off shifting college savings that may have been accumulated in the child’s name back to the parents. While there may be tax advantages to keeping investments in a child’s lower income bracket, the financial aid formula leans much more heavily on assets held by the student than those in the parent’s name.

Adding to the complexity is the fact that a financial move that helps one family get more aid may hurt another family’s chances.

While the FAFSA formula is used to dole out federal grants, for example, schools use a separate, so-called “institutional” formula to decide how to spend their own money on financial aid. These formulas count some assets, like a family’s primary residence, that the federal formula doesn’t.

Though these “institutional” formulas tend to be more restrictive, they also give colleges wider latitude in considering special circumstances — like an unexpected medical expense or a recent job loss — when deciding how much aid to offer.

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