From the Clipboard - Why as early as freshman year?
I am often asked why I always say that planning for financial aid and paying for college starts as early as Freshman year. After all, their son or daughter may have just entered high school and may have no idea of what they want to study, never mind where they want to go to college. I totally understand that it would seem too early.
Please keep in mind that I'm not talking about saving money in a savings account or anything else to pay for college. There's plenty of advice out there on how you should save for college starting the day that they're born. I can tell you that in my own case, when my own kids were that young, I was up to my eyeballs and diapers, wipes, and formula and whatever else. And that stuff wasn't cheap! I wasn't even thinking about saving for college.
By Freshman year, families should start considering strategies to get more aid and paying for college are based on the nuts and bolts of financial aid, how financial aid works, and when things count. What students and families typically see is information from the guidance page at their local high school. In an overview of the college planning process, the first time many guidance counselors mention financial aid is at the beginning of senior year.
Your son or daughter would apply for financial aid in the Fall to Winter of their high school senior year. For example, I’m writing this in March 2021, the rising seniors would be applying for admissions and financial aid in this coming Fall/Winter. But the financial aid form uses the most recently completed tax return, which would be the tax return for 2020. What that means is by the time you sit down to fill out the financial aid form, it's too late to go back to adjust anything. After all, you're not going to go back to your boss to return some of your pay in order to qualify for more college financial aid.
The need to start early is due to the timing of when income is considered, which is well before you actually sit down to fill out the form. The year that's considered is known as the base year. The base year is the calendar year that stems from the spring of your Sophomore year to the fall of your Junior year.
It can be confusing since tax returns go by calendar years where for us as school-aged parents, we often think in the school year sense of August or September through May or June. Thus, if you fill out the financial aid form in Fall 2021, planning would need to start by the beginning of 2020 or prior - or up to TWO YEARS before filling out the form.
Those with a regular, salary job may feel like there’s little they can do since there is little to change their income. That’s not exactly true. There are still things that can be done, or avoided, that make their income go higher or lower. Certain one-time events such as selling off investments, cashing in a 401k, or even selling their house. Whether those items are taxable or not, they hit your financial aid form. Well, they go on your tax return, which in turn, would then go on your financial aid form.
If you're a business owner, there are other tax strategies to take advantage of to save and/or pay for college in a very tax efficient way. If you really play to the limit of the rules (legally - not suggesting you break any laws here), there can be a substantial amount saved. If saving taxes is helpful to you, then you would want to do this years earlier. If you wait until right before your base year or right before
you sit down the form it's too late because stuff has already happened.
Often, these financial decisions have nothing to do with college but can still impact financial aid. This is where the timing matters and why starting early helps.
Regardless of employment type, some families may only be able to pay for college by borrowing. Even then, starting early can be helpful. If the family will use private student loans (from a bank, credit union, or similar - NOT from the Federal government), having a good credit score and debt to income ratio are necessary as these loans are underwritten like a mortgage. You may need time to simply clean up your credit. It's one thing if you have an error on your credit report; there's services that can help you clear up inconsistencies or errors on your credit report that don't take a long time. However, if your credit is not great simply because you have a lot of debt, then you need time to pay down your existing loans so that you can perhaps borrow more for college at an interest rate that's not going to break the bank.
This all falls under the category of late stage college planning because it's not about putting money away in a college savings account anymore. Once your kids hit high school age, it's really about these nuts and bolts things because there isn't that much time left.
Even if you're even if you are the parent of a high school Junior, it's not too late as there are still things that you can do. It's just that you have far fewer options and far less time to do them - but are there things you can do! You're up against the clock - IF YOU ARE TRULY INTERESTED IN LOWERING THE COST OF COLLEGE.
The unfortunate part of all this is that this advice really goes counter to the prevailing wisdom out there. Parents and students typically get their information from their guidance counselors or others who say that you don’t start to think about financial aid until senior year when filling out the form.
Quite frankly, if you wait to strategize about financial aid, what you're actually doing is a favor for the other parents. The bulk of financial aid money comes from the colleges themselves and is essentially a zero-sum game. By not positioning your student and your finances in a way to really aid, you're basically handing money that you could have received to other families. The reality is you are in a competition for dollars and at the end day, it's you or them.
But you have to know the rules in order to win the game!
I write primarily on college financial aid and student loan topics. My firm has a particular specialty in working with self-employed or small business owners on these issues.
My content is for educational purposes only and should not be construed as advice or any kind of solicitation to buy or sell anything. As always, consult your own financial or tax professional for your own specific situation. Your mileage may vary. Batteries not included.
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