Reducing your Adjusted Gross Income (AGI) is a viable strategy in trying to reduce your EFC and maximize how much financial aid colleges will offer your child. It’s important to understand that your income is assessed against you anywhere from 5 to 9 times more than your assets. Colleges don’t want you reading this info because it’ll help you “game the system.” Perish the thought! Plus, most aid will be determined more by what you earn than by what you own. Remember – the base year of income on which financial aid is calculated is the calendar year two years prior to the academic year for which the student is applying for aid. That’s why it’s so important to become informed about financial aid years before your child is a junior or senior in high school.
Here are 10 strategies (there are lots more, but are narrowly applicable) you can use to reduce what you pay out-of-pocket for college:
1. The Two-Income Family – The lower wage earner can deduct up to 35% of salary or up to a maximum deduction of $4,000. It’s earned as an “employment allowance.” This allows you to reduce your EFC (Expected Family Contribution), which is what the colleges expect you to pay. NOTE: Do not confuse the term “Contribution” with the word “Donation.” Get it? I thought so.
2. Student Income – The student will lose in financial aid 50 cents on every dollar earned over $6,000. Despite its anti-work ethic, if the aid formula works for you, quit work after earning $6,000. If you don’t qualify for need- based aid, encourage your student to make as much money as possible in order for you to pay less out of pocket. In other words, make your student pay for his/her expenses while in college. Average savings per child will exceed $10,000.
3. Private College Trick – Most private schools that require the CSS Profile will assume an incoming freshman will make at least $2,000 during the summer. When the “award” letter comes, a certain income amount will either be hidden in your EFC number, or fully stated. This is the equivalent of a little annoying surcharge that pops up on a bill and can be dropped if you protest it, that is, write a matter-of-fact, non-complaining, appeal letter to indicate this expectation, or the actual dollar amount was never listed on the school’s website, thereby suggesting an intentionally hidden fee. Even if they do list the amount, ask them to justify how they arrived at their figure. Brace yourself: you will either witness a carved-in-stone masterpiece of obfuscation, or the equivalent of distinct mumbling sounds you cannot possibly understand. Call them on it, but always be positive when communicating with the financial aid office, even when your suspicions are dead-on.
4. State + Local Tax Refunds – To reduce your taxable income, see if you can get refunds postponed until after graduation so you can reduce your taxable income now. Hint: if you collected a refund of, say, $1,600 each year over a 4-year period, you may have lost as much as $3,000 in grants. Consult your tax person before you get excited.
5. Tax Credits – Most parents qualify for them. They are the Hope Scholarship Credit (up to $1,500) and The Lifetime Learning Credit (up to $2,000). You could lose some financial aid in these cases, but the gain will surely offset any loss. For each year your child is in college, get IRS Form 8863. Then there’s the American Opportunity Tax Credit, a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year. Also, 40% of the credit (up to $1,000) is refundable. This means you can get it even if you owe no tax. CAUTION: it’s only good for 4 years when there’s an 80% chance your child will spend five and even six years to get an undergrad degree. Ouch!
6, Borrowing from a 401(k) or 403(b) – With fairly low interest rates and repayment terms that are quite doable, this is tax-free “income.” Call your plan administrator for guidance, but remember, your retirement is far more important that your child’s college education. You can borrow for education, but not for retirement.
7. Medical Expenses – Contact lenses, braces, cab to the doctor’s office – all fit into those medical expenses that are considered in the federal aid formulas. Keep excellent records of out-of-pocket costs. The self-employed should wave their health insurance premiums like a red flag in front of a financial aid director – it’s a legitimate factor as to how much more aid you can receive.
8. Recently Unemployed or Disabled – Colleges are likely to help you with more aid if you’re out of work. They’ll likely want proof, such as a termination notice or doctor’s statement. You should contact them immediately. Ask the school to exercise what is known as “Professional Judgment.” It’ll signal that you know how to play the college game, and they’ll likely respond in your favor.
9. Retirement Contributions – What’s already in your retirement account doesn’t count against you, but the money you’re contributing during the college years does. You may consider deferring any contributions to your retirement if you think you’ll need the money to pay for a high EFC.
10. Alimony/Divorce – If your ex is behind in payments, get out the party hats and refreshments and celebrate. It could mean a lower EFC and more financial aid. Or, in a divorce settlement, the custodial parent should consider getting less income and more assets. Why? The child is likely to receive more financial aid. Side benefit = child gets to witness 2 mature adults place the focus where it belongs – on the child’s needs, not on the parents’ c!ompeting concerns. In short, everybody wins. This scenario is as likely as winning the lottery.