an obtain from the school's financial aid office. You will have to provide tax returns. The amount you are determined to be eligible for depends on your income, the size of your family, the number of family members currently attending college, and your assets.
Related Financial Guide: For information on Equity Loans, please see the Financial Guide: HOME EQUITY LOANS: How To Shop For The One That's Best For You.
How To Increase The Amount Of Financial Aid
Here are some strategies that may increase the amount of aid for which your family is eligible:
- Try to avoid putting assets in your child's name. As a general rule, education funds should be kept in the parents' names, since investments in a child's name can impact negatively on aid eligibility. For example, the rules for determining financial aid decrease the amount of aid for which a child is eligible by 35% of assets the child owns and by 50% of the child's income.
Example: If your child owns $1,000 worth of stock, the amount of aid for which he or she is eligible for is reduced by $350. On the other hand, the amount of aid is reduced by (effectively) only 5.6% of your assets and from 22 to 47% of your income.
- Reduce your income. Income for financial aid purposes is generally determined based upon your previous year's income tax situation. Therefore, in the years immediately prior to and during college, try to reduce your taxable income. Some ways to do this include:
- Defer capital gains.
- Sell losing investments.
- Reduce the income from your business. If you are the owner of your own business, you may be able to reduce your taxable income by taking a lower salary, deferring bonuses, etc.
- Avoid distributions from retirement plans or IRAs in these years.
- Pay your federal and state taxes during the year in the form of estimated payments rather than waiting until April 15 of the following year.
- Since a portion of discretionary assets is included in the family's expected contribution from income, reduce discretionary assets by paying off credit cards and other consumer loans.
- Take advantage of vehicles which defer income, such as 401(k) plans, other retirement plans or annuities.
Detail your financial hardships. If you have any financial hardships, let the deciding authorities know (via the statement of financial need) exactly what they are, if they are not clear on the application. The financial aid officer may be able to assist you in explaining hardships.
- Are at least 24 years old by the end of the year for which they are applying for aid,
- Are veterans,
- Have dependents other than their spouse,
- Are wards of the court or both parents are deceased,
- Are graduate or professional students or
- Are married and are not claimed as dependents on their parents' returns.
As noted above, education funds should generally be kept in the parents' names because of financial-aid considerations. However, in specific cases, it may be better to keep the investments in your child's name since the tax rate on the income will be less than if they are held in your name. Professional advice should be sought in making this decision.
In the past, parents would invest in the child's name in order to shift income to the lower-bracket child. However, the addition of the "kiddie tax" mostly put an end to that strategy. Now, investment income over $2,000 for 2014 (same as 2013) of children under the age of 19 (or 24 if a full time student) is taxed at the parents' rate. (This threshold is indexed annually for inflation.) Once the child reaches age 19, however, all income is taxed at the child's rate. Of this $2,000, one-half probably won't be taxed due to the availability of the standard deduction while the other half would be taxed at the child's rate.
Note: These rules apply to unearned income. If a child has earned income, this amount is always taxed at the child's rate. If you decide to invest in your child's name, here are some tax strategies to consider:
- You can shift just enough assets to create $2,000 in taxable income to an under-19 child.
- You can buy U.S. Savings