Guest Blog: How to Maximize Your Financial Aid

So, you’ve been saving for your child’s college education. For a while, hopefully. But now is crunch time. The tests are all done, your child is applying to schools, and you’re finally faced with the question that millions of parents are facing at the same time: How am I going to actually pay for it?

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The first place most people start is financial aid. After all, getting anything you can for free should always be the first choice. You read the instructions to the FAFSA – the uniform annual financial aid application – and several articles on strategies to maximize your chances and avoid mistakes. But the ever-changing college application process throws a curve ball: starting in 2024, the form and the process are changing dramatically. So, what do you need to know about the new and supposedly improved financial aid process?

On the surface, changes make sense. The application is drastically reduced in size from 108 questions to 36. The confusing Expected Family Contribution (EFC) methodology is being replaced. There is more aid for single parents such as expanded Pell Grant eligibility. There is also a change for students whose parents are separated or divorced, where the guidance on which parent income to report shifted to the parent who provides the most financial support to the student, rather than the parent who resides with the student.

However, the new formula no longer takes the number of siblings in college into consideration. Also, family farms and small businesses must now be reported as assets. The families where these conditions apply will be negatively affected most. There is also more emphasis on wealth as the FAFSA now asks about trusts and inheritance.

Let us take a look at how the new Student Aid Index (SAI), which replaced EFC, is calculated. SAI is the sum of the total parent and student contributions, each of which is the sum of “available” income and a portion of assets. While the formula for the parents’ available income is convoluted, it is worth noting that in addition to the AGI from previous year’s tax forms certain things like deductible IRA contributions and tax-exempt interest get added back in. On the other hand, pre-tax contributions to your employer's 401(k) or 403(b) or to your HSA no longer have to be added back. There are some deductions as well, and a negative number is allowed.

Once the available income is ready, 12% of parent assets are added in, and the sum is assessed at progressive rates – much like taxes – ranging from 22% to 47%. The popular 529 Savings Plans are counted as parent assets, but these funds are not assessed fully, contrary to the urban legends. Even at the highest rate of 47%, the 12% of these assets yield a mere 5.64% as the maximum portion of these account funds to be counted as parents’ contribution.

The student numbers are easy: students are expected to contribute 100% of their income above the “allowance” of $9,410, and 20% of student assets – usually savings – round up the formula. The gross cost of college attendance less the SAI number determines the family’s financial need.

Still with me? So how do you make sense of it all and what can you do to help maximize your financial aid? For starters, your 401(k) plan has just become more valuable. Not only you can save for retirement on a tax-deferred basis and reduce current year’s tax liability, but you would also reduce your expected college bill that the IRA contribution will not help with. If you are a small business owner, consider switching from SEP or Simple IRA to Solo 401(k) plan for the same reason. And if you have employees, consider switching to C-Corp and using corporate 401(k) Plans.

Planning for college education could be stressful and time-consuming, but with the right approach and process you can save many thousands of dollars. Eureka Wealth Solutions is a wealth manager that can help with every aspect of it. Finding the right investment vehicle for college savings early on, managing investments in these accounts, estimating financial aid and picking the strategies to maximize it, finding additional financial resources, choosing the best payment strategies, and balancing it all against your other life and financial goals – Eureka Wealth Solutions can help you along the way to save for as well as save on college.

Image by Pang Yuhao on Unsplash

About the author:  Igor Tsukerman is the Founder and Chief Investment Officer of Eureka Wealth Solutions, a New York-based wealth management firm. For more information about their college planning services please visit https://www.eurekawealthsolutions.com/college-planning.