Ask Kim
Improve Your Financial Aid Odds
Is there anything we can do now to increase our chances of qualifying for financial aid?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
June 14, 2002
My daughter just finished her first year of high school and she's starting to look at colleges. Is there anything we can do now to increase our chances of qualifying for financial aid?
Yes, spend your daughter's money before it's too late.
Financial-aid officers expect children to contribute 35% of their own money each year for college costs, but only expect parents to spend 5.6% of their assets on college each year.
Any money in your daughter's name that you spend before the halfway point of her junior year of high school won't show up in the financial-aid calculations.
You don't want to waste money just to boost your daughter's odds of getting aid -- after all, a lot of the financial aid comes in the form of loans that eventually will have to be paid back. But think of things you'd be spending the money on anyway and consider using funds from her custodial account or a Coverdell education-savings account instead from your savings.
Coverdell ESA money can be used for anything education-related, which can be quite broad-reaching: computer, printer, scanner, Internet access, private-school tuition, public-school fees, books, tutoring (for school or the SATs), summer educational programs, education-related software.
Custodial-account money can be spent on anything for the benefit of your daughter. You can buy her a car, send her on vacation, to camp, buy her a bike, or buy the computer components mentioned above. Pretty much anything is fair game -- educational or not -- as long as it's for her benefit and nobody else's (you can't use her custodial-account money, for example, to pay for your whole family's vacation). For additional ideas, see The Ins and Outs of Custodial Accounts.
Incidentally, 529 plans are a bit tricky right now when it comes to financial aid. They're considered the parents' assets, but some schools consider them the student's income when you start to spend the money -- which can lower your aid by 50 cents on the dollar.
If you have a big 529 balance and are worried about aid, consider holding onto the 529 money until junior or senior year of college, when it won't have as much of an impact on financial aid (time it carefully, though, so you don't have any 529 money left over after she finishes college). For more information about the effect of 529s on financial aid, see A Threat to Financial Aid.