College Ahead: How Can I Improve My Child’s Chances for Financial Aid?

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Dear Carrie: My daughter is starting high school this year, and I’m worried about paying for college. I’ve saved some money, but as a single mom, I’m afraid I just won’t be able to cover it all. Is there anything I can do to increase her chances of receiving financial aid?—A Reader

Dear Reader: I’m glad you’re asking this question now while you still have several years to plan for college. As I’m sure you know, college can be expensive, but it’s also one of the best investments you can make in your daughter’s future—not only in terms of education but also for her career opportunities and lifetime earnings.

You’re also smart to think ahead about financial aid, because it’s such a powerful resource. In fact, the average award for a full-time student in 2018–19 was $15,210 per undergraduate student and $28,140 per graduate student.

Here are some key steps you can take starting now to help get the most out of financial aid while potentially strengthening other aspects of your personal finances.

Consider Saving in a 529

I encourage you to look into a 529 account in the next several years leading up to your child’s college, for a couple of reasons. Not only do they offer the potential for tax-free earnings for qualified higher education expenses but the ownership rules are more favorable than for a Uniform Trust to Minor’s Account (UTMA) or a Uniform Gift to Minor’s Account (UGMA) when it comes to federal aid.

Generally, 20 percent of a child’s assets and 5.6 percent of the parents’ regular investment assets are used for evaluation. However, a child- or parent-owned 529 is considered owned by the parent and assessed at the 5.6 percent rate. Grandparent-owned 529 accounts aren’t included in the asset evaluation, but distributions may count depending on the year of withdrawal.

Minimize Parent and Student Income During Key Years

Try to avoid large income spikes in the two years prior to applying for financial aid. This can distort your overall financial picture in the Free Application for Federal Student Aid (FASFA). That’s because FAFSA considers income from prior-prior year’s tax filing (for example, if your daughter is going to school in the fall of 2024, it will be based on your 2022 tax return).

This isn’t to say you shouldn’t welcome a pay raise or bonus. But consider avoiding or minimizing high income from the sale of securities, large withdrawals from retirement plans, exercising stock options, etc., during these calculation years.

Other potential strategies include managing financial gifts, deferring bonuses or accelerating a sale of assets. For example, a financial gift to your daughter could be made to a 529. Bottom line, it’s smart to work with a tax and financial adviser before making any big financial moves.

Fill Out the FAFSA

The FAFSA is the main gateway to most financial aid: Grants, scholarships, work-study programs, and tax benefits are aid sources you don’t have to pay back. Subsidized and unsubsidized student loans can bring down costs and provide additional funding, but unless forgiven, they will need to be paid back.

A common mistake is to incorrectly assume you won’t qualify for aid, so don’t fall into that trap—and don’t rule out schools with an expensive price sticker. Financial aid can help bridge the gap with schools you may think are out of reach. Colleges that admit you will use your FAFSA to determine the amounts and types of aid you’re eligible to receive. You’ll then need to contact the financial aid offices for specifics of applying for aid at those colleges. Don’t skip this key step.

Moneythink has a cool new tool called DecidED to help students and families understand student financial aid award letters—and assess factors like institutional outcomes and starting average salary. This helps you to know the true cost of your college options, evaluate and compare your choices, and make an informed—and affordable—enrollment decision that reduces the guesswork.

Set Yourself Up for Success

Contrary to popular belief, having more debt doesn’t increase your chances of aid. Paying off your high-interest debt from taxable accounts can both reduce the amount of reportable assets you have and save you interest.

Next, keep saving in your retirement accounts. Qualified retirement accounts like IRAs, 401(k)s, thrift savings plans (TSPs) and 403(b)s aren’t reportable assets when applying for federal aid.

On the other hand, consider avoiding buying annuities or life insurance products that are sometimes sold to “hide” assets. High fees, lack of liquidity, and high complexity can make insurance products a poor solution. To me, insurance products should only be purchased if you need the insurance.

Complete All Financial Aid Applications on Time, and Update as Needed

Look out for federal, state, and institution deadlines because they may all be different! And some financial aid is available on a first-come, first-served basis. It’s always wise to be an early bird.

Don’t be reluctant to appeal your financial aid offers if your circumstances change. Divorce, death in the family, a job loss, or losses due to the pandemic or natural disasters can all impact eligibility, so in these cases, reach out to the school financial aid officer.

Don’t Ignore Small Scholarships

Winning a full-ride athletic or academic scholarship may be great, but in reality, very few families pay for all of their college costs this way. Don’t overestimate your chance of winning a scholarship and neglect to save. But do keep in mind that scholarships come in all different shapes (including merit-based, academic, athletic and affinity groups) and sizes. Smaller or lesser-known scholarships often go overlooked, but even small awards can add up!

Double-Check GI Bill Benefits

This may not apply to your family, but it’s important for active duty/reservist service members and veterans to know that the Post-9/11 GI Bill allows service members to transfer unused education benefits to certain family members. Recently, one of my colleagues realized he had 21 months that he could transfer to his spouse or child even after completing an undergraduate degree and an MBA degree! If you’ve earned this benefit, make sure you use it.

As you look to the future, keep your eyes on the finish line. Save as much as you can; fill out the FAFSA; and pay attention to key steps, deadlines, and planning considerations to maximize your chances. Best of luck on achieving what could be a life-changing journey for your daughter.

Carrie Schwab-Pomerantz, a certified financial planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.”