Financial Aid Impact of Savings and Investments

Financial Aid Impact of Savings and Investments College funding is a combination of strategies to lower the overall cost.  It’s not just about 529 savings or dealing with the FAFSA.  It is more holistic.  When considering the financial aid impact of savings and investments on college funding, you’ll need to look at a bigger picture to balance cash flow, education and retirement goals.

Recently, another adviser asked about ways to help a client invest for intermediate and longer-term goals given the age of their college-bound students.  They expressed concern about the impact that specific assets may have on their ability to qualify their children for financial aid.

Are there techniques, strategies or assets outside of qualified retirement plans that they can utilize that will not expressly hurt their chances of receiving aid or may even enhance their chances?  Short answer is: Yes. The longer answer is: It depends.

Without knowing the particulars of a family’s income, marginal tax rate and budget, I can only provide an overview but these guidelines will work for most families.

If their investments are held in retirement accounts, these will not be counted for financial aid.  So first suggestion is to direct the investment to IRAs.  If they are or could be self-employed – even if only part-time, you’ll have more flexibility (such as through a Simplified Employee Pension or SEP that allows higher contribution limits).

You could consider an annuity for investments above the IRA limits.  I prefer to use no-load, low-cost, no frills offerings like those from Jefferson National. This checks off two criteria:  savings for retirement and assets that do not impact financial aid.

Non-IRA assets should be shifted to those which may not generate income and interest.  So you may want to look at growth-stock investments.  Instead of mutual funds, you may want to hold the actual stocks because you’ll have more control over the timing of sales.  Mutual funds would likely kick out capital gains which will also increase the all-important Adjusted Gross Income (AGI) figure used in financial aid formulas.

If you are planning on tapping any non-IRA assets to pay for school and it has low cost basis, you may want to consider shifting the asset to the child (lower tax bracket and possibly no Kiddie Tax).  This won’t help with financial aid but will lower the tax bill.

There are a range of techniques that can be used when it comes to income during the student’s Base Year for financial aid calculation:

  • Delaying bonuses or stock option sales until after Base Year;
  • Loading up on retirement accounts prior to Base Year;
  • Funding 529 accounts held by relatives for the student’s benefit;
  • Recognizing tax losses in Base Year to lower AGI;
  • Defer sale of US Savings Bonds until after Base Year;
  • Reinvest in growth stocks (possibly small cap) to avoid dividend income in Base Year.

Every technique has it’s pluses and minuses depending on the family’s situation.  And if there will be more than one child in college at the same time, these tips may be doubly beneficial.

The more important issue is finding the right school where the student can be motivated to complete on time or earlier (it takes 5 1/2 years for a 4-year degree on average).  Finding the school that offers the right mix of aid (preferably in the form of grants not loans) will be important.

Ultimately, finding the right mix of loans will be as important since most parents don’t have the resources to pay full boat out of the gate (hint: PLUS loans are a last resort especially since private loans have lower interest rates but DON’T do a cash out refi and simply hold the proceeds in cash since that will turn a non-countable asset – home equity – into a countable asset that will likely hurt financial aid chances).