Monday, May 23, 2011

Maximizing your financial aid

I recently received my financial aid package from my business school of choice and it was very, very good news to the tune of $34,500 in free money each year.  This was significantly more aid than I was expecting to receive and I've been very grateful.  I think some of my financial preparation for business school has contributed to my grant good fortune.  Here are some steps you can take to ensure you receive the full aid you're eligible for under your school's policy:
  1. File your taxes.  Graduate programs pretty much all ask for tax returns to evaluate and verify your income for up to several years prior to entering your program.  If you are unable to produce these documents you may become ineligible for need-based aid.  You also don't want to owe money to the IRS since they can, among other things, dock your wages.  So once you start thinking about graduate school review your tax returns and make sure you're all settled up.
  2. Make sure you are filing correctly and claiming all the deductions you are eligible for.  Mistakes in your tax returns can derail your financial aid application.  You also want to make sure that you are claiming all of the deductions and credits you are eligible for especially above the line deductions.  Essentially, you want to make yourself look as poor as possible on your tax returns. Also paying less in taxes means you have the money to save more to pay for your degree.
  3. Contribute to your 401k.  Most graduate school and the FAFSA give preference to retirement funds, valuing them as less available than savings account balances.  You also pay less in taxes when you contribute to a 401k and dramatically lower your AGI on your return.  If you were going to save a large amount of money anyway, doing so in a 401k would likely increase the amount of aid you'd be eligible for.  Many schools will not consider retirement assets up to a certain level such as $100,000 as being available for your degree.  That's a large amount of money you can shelter.  The downside is that you cannot access this money without significant penalties to pay for your degree. However, having solid retirement savings in place can increase your ability to quickly pay off any student loans you do take on after you've graduated. 
  4. Max out your Roth IRA.  This tactic is almost a no-brainer.  With a Roth IRA you can have it both ways - you can get a tax advantaged, school ignored savings shelter and you also have the option of pulling out any contributions you've made penalty-free to pay for your education.  The Roth offers the most flexibility for anyone looking at graduate school. 
  5. Start a 529 plan.  These plans offer several advantages.  I've read in some places that the FAFSA and other financial aid formulas may count these funds at a lower rate than liquid savings.  The growth in the plan is tax free when used for educational expenses and there may be significant state tax benefits in your state.  Contributing to a 529 also demonstrates that you've made a conscious effort to save towards your degree's costs, though I'm not sure how much that would actually help your aid package. An important consideration is to see if your plan allows same-year withdrawals as this will dictate the timing of your contributions and distributions to some extent.
  6. Accelerate expenses.  Pre-paying any expenses you might have will lower your available assets on your financial aid application often resulting in more aid.
  7. Defer income.  Unless you can defer the income until your last year of graduate school and after you've finished all yearly applications for aid, this won't make a big difference in your aid package since you have to state income every year you apply for aid.  However, deferring income to a year when you're in school means that you will be earning less and the money will be taxed at a lower rate.  This is an area to think about when you consider a transaction with capital gains or if you are self-employed.
These are just a few way that you may be able to tune your finances to be more eligible for need-based aid.  It is very, very important to only use legal and honest methods for upping your financial aid package since any dishonesty would likely result not only in no aid but also in no degree at all.  Make sure you fill out forms as soon as possible in case aid is rolling and take a second look over anything you submit for misplaced decimals or forgotten assets.   Aid formulas and funds vary significantly from school to school and these methods may not yield any significant benefit for you, but there is little harm in contributing to retirement or 529 accounts and making sure your tax returns are filed correctly.

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  1. Wow that's fantastic!! That's a lot of free money.

  2. The 529 is only helpful if your parents open it. If it belongs to the student is counted the same as all other assets.

  3. I took financial modelling courses in dubai and encountered the same list from a topic that tackled how to grow your money in more creative ways.

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  5. Definitely doesn't hurt to accelerate expenses these days. I heard that doing that also helps a bit in putting up a better credit score for the user.