How to Help Your Clients Maximize College Financial Aid - 05-15-25

College tuition continues to climb, and for many families, financial aid can make or break their ability to afford their child’s higher education dreams. What most don’t realize is that their tax return — filed long before students even begin applying for college — plays a major role in determining how much financial aid they’ll receive. This is where you come in. Tax professionals and financial planners are uniquely positioned to help clients qualify for more college financial aid. But only if you know what to look for. Listen in to learn more!

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Transcript

Welcome to the deep dive. Today, we're, zeroing in on something really valuable for you, our tax professional listeners, unlocking maximum college financial aid for your clients. Mhmm. This isn't just, you know, filing taxes. It's about offering a service that, well, goes the extra mile for families.

A game changer, really. Absolutely. For tax pros, getting a good handle on the college financial aid picture, especially AFSA, well, it makes you an even more critical adviser. Right. It's a genuine chance to build deeper connections with your clients, become that go to person for these these big financial moments.

Okay. Let's dig into that. The, the linchpin here is the half assess, the free application for federal student aid. Think of it as the main key for federal grants, loans, work study. Exactly.

It's designed to get a full picture, a snapshot of family's financial situation. So it pulls data from everyone involved? Yeah. The student, their spouse, if they have one, and for dependent students, the parents. Mhmm.

Their income, their assets, all that financial info. And colleges use this how? Well, they take that APSA info, look at their own cost of attendance, and then figure out what kind of aid that student might qualify for. Okay. And central to this is the SAI, the student aid index that replaced the old EFC.

It did. And it's really important for us and for you advising clients to remember, the SAI isn't literally what they'll pay. Right. Not the exact dollar amount. No.

It's a number calculated from the CAFSS SA data. It basically represents the student's available financial resources, you know, minus the standard allowance for basic living costs. So lower SAI, better chance for aid. Generally, yes. Yeah.

A lower SAI signals more financial need. Yeah. That really increases the odds for things like Pell grants and other need based aid programs. Okay. Think of it like, say a family has an SAI of $10,000 and the college costs $30,000.

They'd likely be considered for up to $20,000 in need based aid Yeah. Roughly speaking. Got it. Now here's where it gets, well, really interesting for tax pros. The FSAI uses prior prior year tax data.

Mhmm. So for the twenty twenty five, twenty six six school year, clients are reporting their 2023 tax info. Exactly. That's the base year. And understanding this concept is just fundamental for any real planning.

Because the decisions they made two years ago matter now. Precisely. That two year look back means financial choices made when a student was maybe a sophomore or junior in high school directly impacted for freshman year of college. It's why starting these conversations early is so, so important. Okay.

So our mission today really is to arm you, the tax professional, with some practical strategies you can actually use to help guide your clients through this effectively. Alright. Let's get into those strategies. First step, planning way ahead, not just senior year, but years in advance. Absolutely.

Because freshman year aid looks back at income from the student's sophomore, maybe junior year of high school. You really wanna be planting these seeds with families when their kids are, say, in middle school. Middle school. Wow. They're early high school.

Definitely. It just gives them a much longer runway to make smart financial moves that could boost aid eligibility later on. So a key focus then is managing that base year income, and it's not just AGI from the tax return, is it? No. FAFSA casts a wider net than just adjusted gross income.

The formula, also pulls in certain untaxed income. Like what? Well, for instance, distributions from Roth IRAs. And also those pretax contributions to traditional retirement plans, like a four zero one k or traditional IRA. Oh, interesting.

So things that give you a tax break. Right. They can actually inflate the income figure on the FSA. It's a bit counterintuitive. Yeah.

Good for taxes, potentially less good for financial aid calculations. Okay. So what specific advice can tax pros give clients about managing that base year income? What levers can they pull? There are several things.

For clients who have some flexibility, strategically delaying retirement distributions during those key base years can make a difference. Even small delays. Yeah. If someone's nearing retirement but still in that window, postponing some taxable distributions, even temporarily, can sometimes have a noticeable effect. Same goes for income like bonuses if it's possible to defer receiving it past the base year end.

Did that help? And standard tax planning like loss harvesting. Oh, absolutely. Tax loss harvesting to offset capital gains naturally lowers the income picture. And it's worth mentioning too.

Some things work the other way, like education tax credits claimed or taxable scholarships and work study income. Those can actually reduce the income counted by FS. Okay. Let's switch gears to assets. This is timed differently.

Right? FSET looks at assets when? Right. Income is that prior prior year look back, but assets are assessed as of the date the FS is actually submitted. It's a snapshot in time.

So what's counted and what's, protected? Good question. Things like qualified retirement accounts, four zero one k, IRAs, and the family's primary home equity, those are generally shielded. They don't count as reportable assets. Okay.

But nonretirement investments, you know, brokerage accounts, mutual funds outside of retirement plans, checking, savings, even 529 plans owned by the parent or student. Those are included. So the strategy is to minimize those reportable assets before filing? That's the general idea. Yeah.

Exploring ways to responsibly reduce the value of those reportable assets before that asset snapshot date. Give us some examples. What can clients actually do? Well, one pretty straightforward tactic is paying down debt, especially non mortgage debt. Like credit cards, car loans.

Exactly. Using funds from, say, a savings account, which is reportable to pay down a credit card balance, effectively shifts that money out of the reportable asset column. Similarly, if they're planning any big purchases anyway. Like a new car or fixing the roof. Yeah.

Things like that. If feasible, making those purchases before filing the VAPSES can also lower the balances in their checking or savings accounts on that snapshot date. Makes sense. And what about assets in the student's name? I heard those are treated, well, differently.

Yes. They are. Student assets are weighted much more heavily in the aid formula than parental assets. How much more? It can be insignificant, something like, around 20% or even more assessed versus maybe 6% for parent assets, roughly.

So even a relatively small amount in the student's name, like in a savings account or UGMA, Udevi. UGMA, UTMA. Or Yeah. Those custodial accounts. That could reduce aid eligibility more than the same amount held by the parents.

So the advice is Generally, try to minimize reportable assets held directly by the student. If it makes sense legally and ethically, perhaps shift assets to the parents' names. Or a very common strategy for those UGMA, UTMA's is to plan to spend that money down first on college costs before tapping into parent savings or or five twenty nines. Okay. Another piece of advice we hear a lot, file the FSES early.

Why is that so critical? Oh, it's huge. Filing as early as possible, usually, the window opens in October, though that can shift really boost the chances for aid. Not just federal aid? No.

Definitely not. Many states and, crucially, individual colleges use the data to distribute their own grants and scholarships, and a lot of that institutional money, especially, is first come, first served. Ah, so the early bird. Pretty much. Early filers just have a better shot before the pools run dry.

So we definitely advise clients, gather the documents early, know the opening date, and track all the deadlines, federal, state, and every single college they're applying to. They can vary. Let's touch on some, trickier situations tax pros often see. Divorced or separated parents. The rules changed there recently.

It did. Yeah. With the EFSA Simplification Act, the rule now is that the parent who provided the greater portion of the student's financial support in the twelve months before filing is the one whose information goes on the FSA. Regardless of custody. Irrespective of primary residence or custody agreements, yes.

It's purely about financial support. And for you as advisers, this is interesting because, well, depending on how support is structured and documented, there might be, let's say, some strategic considerations about which parent ends up being the contributor. That's a really key point for advisers working with those families. Okay. And what if that base year income, that 2023 income for the twenty twenty five, twenty six abscess, just doesn't reflect where the family is now?

Say, a job loss happened in 2024. Right. That's a common scenario. And that's where the professional judgment review process comes in. It's vital.

How does that work? If a family has had a significant change, job loss, big income drop, maybe unusually high medical expenses, things like that, basically, anything that makes the base year data a poor reflection of their current ability to pay, they can appeal. Appeal to who? Directly to the college's financial aid office. They petition for a professional judgment review, explain the circumstances, provide documentation.

The financial aid administrators have the authority to override the standard FAFSA calculation and use the updated information. That's really good to know. It is. And importantly, this only works if the situation got worse. If their income went up since the base here, well, there's no need to volunteer that information.

Understood. Okay. Let's circle back to our listeners, the tax professionals. How can they really use all this knowledge to add serious value for their clients? This is just such a prime area.

College planning is a massive financial event for families, and you, as their tax adviser, are already trusted with sensitive financial data. It's a natural extension. So move beyond just the tax return prep. Exactly. Start identifying clients with college bound kids early, middle school, early high school, like we said.

Educate them on how FAFSA works, the timelines, that huge impact of the prior prior year data. And encourage everyone to file even if they think they won't qualify. Absolutely. You never know. Many colleges use the FAFSA even for merit based aid consideration or just to get students in their system for any potential institutional funds.

Filing is almost always worth it. So what are some concrete practical steps tax pros can start doing, like tomorrow? Start asking the questions. In your regular client meetings or discovery calls, ask about kids' ages, college plans. Ask about household structure, any expected income shifts, how they're thinking about saving or paying for college.

Position yourself as more than just the tax person. Right. Be that broader financial resource. Maybe develop some simple tools, a college planning checklist tied to tax years perhaps, a basic guide to FAFSA changes, info on loan forgiveness. Educational webinars maybe?

Great idea. A webinar on FAFSA strategies for your client base could be incredibly valuable. The main thing is remembering that window of influence closes once that base year is over and the AFISA is filed. So getting in early is critical. It really does feel like a way to move beyond compliance and become a true financial guide for clients on these major life goals.

It absolutely is. When you help a family navigate college financing effectively, maximizing their aid Mhmm. That builds incredible loyalty and trust, you become indispensable. So wrapping things up, the big takeaway here is proactive tax planning. Really understanding that prior prior year rule and starting these conversations early.

That's what's essential for maximizing college aid. Mhmm. And tax professionals are just uniquely positioned to lead that charge. Couldn't agree more. You already have the financial insight, the understanding of their tax situation.

You're the perfect person to connect the dots to financial aid. Which leaves us with a final thought for you listening. How can you proactively identify and engage their plans much earlier in this college planning process? How can you integrate these strategies so they become just a standard part of your service, delivering maximum value and building those deeper lasting relationships? Something to think about.

Thanks for taking this deep dive with us today.