Tips for Financial Aid

January is financial aid season and college-bound students and their parents are quickly organizing their paperwork to complete the appropriate forms, which will certainly dictate how they will pay their college tuition. To add even more confusion to an already complicated process, this election year saw the Democrats take control of the House and Senate; as a result, several financial aid issues are slated for quick change.

The Democrats are focused on increasing Pell Grants and lowering interest rates while detractors believe this may actually drive up tuition costs. Clearly the college funding landscape has become more dynamic with the shift in partisan control and recent tax law changes, especially the Pension Protection Act (PPA). The PPA provided 529 College Savings Plans with a much-needed boost as it abolished the “sunset clause,” granting permanent tax-free savings to the popular college savings vehicle. 

The availability of financial aid is shrinking and MFS Investment Management offers the following tips to help parents maximize college savings and financial aid strategies:

-Financial aid is a valuable tool in meeting the high cost of college tuition, but parents need to remember that the equation for funding a college education usually consists of financial aid, college savings and current income, all in equal parts. By focusing only on financial aid, parents miss out on two-thirds of the college funding equation.

-Open a 529 plan in the parent’s name, listing the child as the beneficiary. When determining financial aid, 529s are considered assets of the owner; federal aid formulas count only 5.6 percent of parental assets while counting 35 percent of money saved in a child’s name.

-If a UGMA/UTMA account is held in the child’s name, consider using the assets for pre-college expenses, including high school tuition or college prep courses. Then contribute a comparable amount to the parent-held 529 account.

-529s provide many advantages when applying for financial aid and another option is to convert UGMA/ UTMA accounts or other assets held in the child’s name to a 529 account held by the parent to benefit from tax-free growth potential.

-Plan ahead when submitting the complete FAFSA application so assets can be properly aligned before filing.

H vice president, MFS Investment Management, and manager of MFS 529 savings plans.