Lowering your family’s EFC is a matter of putting college savings in the right place. “One way to reduce your EFC is to save in the parent’s name rather than the child’s name,” says Hurley. That’s because the Department of Education assesses a student’s assets at 20% for college costs, versus no more than 5.64% for a parent’s assets. How does that work, exactly? Let’s say you opened up an investment account for your daughter when she was born. Over the years, you have contributed to the account, watching it grow to $25,000. When your daughter applies for college aid, that $25,000 in her name will add $5,000 (20% of $25,000) to your family’s EFC. On the other hand, if you had kept that $25,000 in your name, it would add only $1,410 (or 5.64% of $25,000) to the family’s expected contribution. In this example, your EFC is $3,590 lower, by investing in your name, and your daughter might begin her freshman year with $3,590 more in financial aid.
Saving and investing in your own name makes sense if you have young children who are many years from college. But what can you do if you have teens or pre-teens who already have substantial assets in their own name? One tactic is to take cash from savings and investment accounts and put it into a 529 college savings plan, Hurley advises. These plans, offered by every state, allow you to earn investment income, tax-free. Withdrawals are also tax-free, as long as the money is spent on college bills. “Assets in a 529 plan are assessed for financial aid at the parent’s rate, up to 5.64%,” says Hurley, “not the student’s 20% rate.” You’ll wind up with fewer student assets, more parent assets, and a greater chance for increased financial aid.
This article originally appeared in the June 2010 issue of Black Enterprise magazine.