Financial Aid Strategies With a Catch

Your kid is halfway through high school, and the gap between your savings and the cost of college has grown alarmingly wide. Understandably, you want to position your finances, and your student, to attract as much financial aid as possible, preferably in the form of grants and scholarships you don't have to pay back.

Meet the financial aid consultants. Also known as college financial planners, they can help you navigate the convoluted financial aid process and, if you visit them early enough, provide valuable advice on saving for college. Typically, they market their services through referrals from college admissions consultants or presentations at high schools and community colleges, or through their general financial-planning practices. Many offer a free initial consultation, then charge by the hour or session -- say, $100 to $250 -- after you sign on.

But some planners go further, using the sessions to sell you a financial product that gets them a commission but may not get you college money. Others charge several thousand dollars for an iffy outcome, or make promises about money that isn’t theirs to give away. Some of the advice can even hurt your finances or leave your student deep in debt. Think twice before you fork out big bucks for the sake of financial aid. Some of the strategies you’re likely to hear may not pan out.

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STRATEGY: Lowering your expected family contribution.

If you’ve already filled out the Free Application for Federal Student Aid (FAFSA), you know that the expected family contribution, or EFC, is the amount you supposedly can afford to cover in college costs, based on the federal financial aid formula. Some private colleges use a different method, called the institutional formula, to come up with a comparable number. Either way, the expected family contribution is a starting point for determining your need. Theoretically, the wider the gap between your EFC and the total cost of attendance, the more money you get.

Accordingly, planners will suggest ways to lower your EFC -- say, by postponing a bonus into the following year, or spending down savings, especially in your student's account.

THE CATCH:

Those tactics won't necessarily change your out-of-pocket cost. Why? Few colleges fill the entire gap between the amount you are expected to pay and the cost of attendance, and any award you do receive will probably be a combination of grants, work-study and federal loans -- not the rich package of grants you were hoping for.

Rather than rely on a FAFSA-produced number to gauge how your award might shape up, use the net-price calculators (required by law as of October 2011) posted on college Web sites (Read our article: How to Zero In on the True Cost of College). The net price reflects grants, not loans, based on the average award for families in your circumstances. (Be sure to focus on net price as opposed to net cost, which is what you get when you subtract the entire aid package, including loans, from the cost of attendance.)

STRATEGY: Taking assets off the table.

Whatever your expected contribution, neither colleges nor the feds expect you to put every penny you have toward the college bills (although it may seem that way). Both the federal and the institutional formulas remove certain types of assets from the financial aid calculation before crunching the numbers, the idea being to leave you a way to sustain yourself after your kids get through college. Among the excluded assets: retirement accounts and cash-value life insurance. The federal formula also excludes home equity; the institutional formula includes it.

Some advisers recommend that you convert assets that count against you in the formulas into assets that don't -- say, by selling stocks or borrowing against home equity and investing in a variable life insurance policy.

THE CATCH:

Before you make such a move, know that income, not assets, is by far the biggest factor in financial aid. If you earn too much, you won’t qualify for aid no matter where you stash your cash. As for home equity, the vast majority of colleges use the FAFSA, which ignores that asset. Colleges that do consider equity often cap the amount at one or two times your income, rendering it less significant in the financial aid calculation.

Nor should you worry unduly about the impact of other, countable assets on your financial aid prospects. The federal formula protects a chunk of parental assets, based on the age of the older parent, and it assesses the remainder at 5.6%; the institutional formula also protects parental assets using a different calculation. (Student assets have no such protection and are assessed more heavily.) The amount protected in the federal formula approximates the age of the older parent times $1,000, so a parent age 50 would have a protected allowance of $50,000. Most families don’t have nearly that much in savings outside of retirement accounts, says Robert Feil, of Waterfront College Planning, in Neptune, N.J. For those families, "a life insurance policy will not help at all. All it will do is give a life insurance agent a commission."

Consider, too, that shifting assets actually costs money, in the form of capital-gains taxes on a stock sale or interest on a home-equity loan. And making important financial decisions based on financial aid prospects can have unforeseen consequences. A few years ago, "people were sucking out their home equity and putting it in life insurance," says Rick Darvis, of the National Institute of Certified College Planners. When the housing market crashed and their equity shrank, they were stuck with the loans, and some lost their homes.

STRATEGY: Focusing exclusively on getting the most money.

Some financial aid advisers offer to improve your chances for aid regardless of your child's interests or the schools on his or her list.

THE CATCH:

This strategy ignores looking for a school that represents the best fit for your student. "One of the biggest misconceptions I see is the idea that admissions decisions and financial aid decisions are separate from each other," says Feil. "Playing with numbers is not the be-all and end-all. Colleges want to know if the student will be an asset. They will make the financial aid offer more lucrative for students they’re really excited about than for students they’re not excited about."

They also might up the ante if they suspect your student has more-lucrative offers on the table from competing colleges, says Richard DiFeliciantonio, vice-president for enrollment at Ursinus College, in Collegeville, Pa. "I have to calculate not only people’s need but also their willingness to pay." The message? Don’t let a financial adviser persuade you that the FAFSA is the last word. Find a school that suits your student's strengths, and have a conversation with the financial aid office about your chances for aid.

STRATEGY: Hiring a pro to fill out the FAFSA.

Once, the FAFSA was a complex, multi-page application that struck fear in the hearts of parents, some of whom were willing to pay a financial aid consultant $100 or more to complete the form for them. Financial planners will still offer to do the work for you and will charge accordingly.

THE CATCH:

If you pay a financial aid adviser to complete the FAFSA for you or give you advice in completing the application, he or she is required to sign it. That doesn't assure you of financial aid or take you off the hook for providing inaccurate information, but it just might cause your application to get noticed -- and not in a good way, says Mark Kantrowitz, publisher of Finaid.org. Financial aid officers give closer scrutiny to an application prepared by a professional than to one you prepare on your own, and they may look harder for anomalies.

Improvements to the federal application, including a streamlined, online format, have made the do-it-yourself approach less daunting and professional help less enticing. "The FAFSA is not that complicated," says Cara Stevens, a high school counselor and part-time college planning consultant in Marion, Ohio.

For free handholding, however, try the FAFSA-guidance nights in your community, typically at your high school or community college. "Families can come in, bring their tax information, sit at the computer and have somebody there who can help them with the questions that come up," says Stevens. Local branches of public universities represent another good resource, she says, as do Web sites such as Finaid.org.

STRATEGY: Fudging the numbers.

Presenting your finances in the most advantageous light is one thing, but some advisers have been known to cross the line, encouraging clients to present a picture of their finances that is downright misleading.

THE CATCH:

If you venture into fraud, not only do you risk a fine or even imprisonment for lying on your federal aid application, but you'll likely be taking that risk for nothing. Financial aid administrators are alert to information that doesn't add up, such as an application from a wealthy zip code that reports an unusually low income, or one that lists interest and dividends without showing corresponding assets. "These things do get caught," says Kantrowitz.

What happens then? Even if you don’t technically lie, financial aid officers who think you're trying to hide the ball will ask you to verify your information and adjust the numbers, if needed, to more accurately reflect your financial situation. The more manipulation they spot or even suspect, the less likely you’ll end up with a grant out of institutional funds or a successful appeal of your financial aid award, says Kantrowitz. Recently, the federal government has improved its system for spotting red flags and requiring that families verify FAFSA information.