Invest Wisely to Maximize Student Aid

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How do you plan to pay for college? Will your family apply for need-based financial aid? If so, review the following checklist to learn how capital gains, retirement accounts and more may help or hurt eligibility for aid on the FAFSA (free application for federal student aid).

What You Can Do – and When

Right now: Balance saving and spending priorities.

  • Save in a 529 college savings plan or other account that holds the assets in the parent's name. Parent assets are not weighed as heavily as child assets in federal aid formulas. If a grandparent owns the 529 college savings plan, the impact on financial aid is likely zero.
  • Two years before enrollment: Pay attention to financial and investing decisions that may affect eligibility for financial aid.
  • Spend smart. If you are planning any large purchases, make them now and pay in cash – just don't raid emergency savings to do it.
  • Pay down debt. Consumer debt is not subtracted from family income in student aid formulas, so it's wise to pay off credit cards, auto loans and other consumer debt.
  • Maximize retirement contributions before your child's college years. 403(b) and 457 plan assets are sheltered from the aid formulas, so loading up on contributions early is a win-win strategy. During the college years your retirement contributions are reported as income for the following year's financial aid.
    During the application process: For financial aid purposes, the most crucial year is the base income year beginning on Jan. 1 when your child is a junior in high school.
  • Minimize capital gains, which are counted as taxable income. Talk to your investment advisor and set a strategy for holding or selling appreciated assets.
  • Review real estate assets. Don't make the mistake of overestimating (or underestimating) your home's value on the FAFSA. If you don't have a recent appraisal, you may want to try the Federal Housing Index Calculator available at www.fhfa.gov.*
    During the college years: The way you pay for tuition could affect your child's future eligibility for aid.
  • Spend the child's assets first. A student is expected to contribute a larger percentage of his or her assets in financial aid formulas, so spending the student's assets first may net a larger aid package in the future.
  • Don't withdraw money from retirement accounts to pay for college. Doing so may shortchange your retirement future and reduce next year's financial aid eligibility since retirement distributions are considered taxable income.
  • Maximize monetary gifts. A grandparent or relative may choose to send money directly to the school to pay tuition rather than giving money to the child (and avoid gift tax in the process). Ask the school if a direct payment can be made without affecting your family's eligibility for financial aid.

To learn more about financial aid formulas, visit the websites of schools that your child is considering and the official FAFSA site.*

* Website provided for information only. No endorsement is implied.
This financial institution does not give tax advice. Consult your tax advisor for information specific to your situation.