I have written many posts on saving for college. You can refer to them here: Simplifying saving for college, How to get your money into Roth IRA even when IRS prohibits it?, The Mother of All Personal Finance Hacks- Mega Roth, How much to save for college?
If you have read the above articles, you know where, how and how much to save for college. However, what if you just cannot save enough for college. Maybe your income is too low or your expenses too high. Then, you might have to rely on Financial Aid and Scholarships/Grants.
First, terminology distinguishing different kinds of Financial Aid (FinAid):
- Scholarships: Usually, merit-based, sometimes merit cum means. They are given out by private institutions, colleges, and the Government. The student does not have to return this amount.
- Grants: Means based. Given to students who qualify based on income and assets. The student does not have to return this amount. Again, given by private institutions, colleges, and the Government.
- Loans: Usually means based, sometimes merit cum means. This could be a subsidized or an unsubsidized loan for education. The students have to return this amount, however, the terms of these loans vary. The source of these loans is usually the Government.
Now, if you were to qualify for any of these FinAid opportunities, you will have to fill out one or both of the forms:
- FAFSA: This is Free Application for Federal Student Aid (FAFSA).
- CSS: This is the financial aid profile offered by College Board ( CSS).
Most colleges accept FAFSA but some colleges like Stanford want you to specifically fill out CSS. So, what’s the difference between the two?
- CSS Profile is just used for private, non-federal aid while FAFSA is required for any Federal Aid.
- FAFSA excludes the value of your equity in the primary residence and also the value of your small business, while CSS does not.
- CSS asks for the financial information of the non-custodial parents.
- CSS asks for the expected income and expenses (medical expenses, elementary school tuition for your other children and any other circumstances) of the academic year to better judge your ability to pay college tuition.
Now, let’s see what our strategies could be to win the financial aid.
Let’s say you belong to the following category:
- You have low income.
- You have no equity in your primary residence and no small business and no investments.
- You show that in the academic year, you will not have any money leftover to be able to fund your child’s college.
In this case, from both CSS & FAFSA perspective, you don’t need any strategy. You will qualify for financial aid anyway.
So, we need strategies for people in the following groups:
- High income, high assets.
- High income, low assets.
- Low income, high assets.
I am not going to deal with the question if it is moral or ethical for High-income folks to strategize for FinAid or not. I will leave this moral dilemma to the reader.
Here are the main tenets to keep in mind:
- FAFSA and CSS don’t look at your retirement accounts (IRAs, 401Ks). Again, if you have read my articles Simplifying saving for college, How to get your money into Roth IRA even when IRS prohibits it? , The Mother of All Personal Finance Hacks- Mega Roth, you know that I am a big proponent of Roth IRA for college saving, precisely for this reason.
- FAFSA and CSS both primarily look at a prior year’s tax return to assess your income. For eg., my daughter will go to college in 2026. Both FAFSA and CSS will look at my 2024 tax return. Note, they have recently changed the rule. With the earlier rule, they would have looked at my 2025 return.
- FAFSA does not look at the equity in your primary residence nor does it look at the value of your small business.
For the purposes of a case study, let’s assume the college starting year to be 2026.
Low income, high assets strategy:
- The main strategy here is to sell off all your investments in your taxable accounts/real-estate and pay off/down the mortgage on your primary residence with the money. For the case study, this has to be done in the year 2023 so that the capital gains don’t mess with your 2024 tax return.
High income, low assets strategy:
- If this person does not have any assets whatsoever, including Retirement Accounts like Roth IRA, there is not much this person can do. He will automatically get benefited by the fact that he does not have any assets in his investment accounts though.
High income, high assets strategy:
- This person has to show reduced income as well as reduced assets.
- Reduced assets can be shown by “selling your assets in investment accounts and paying off/down your primary residence mortgage” in 2023 strategy.
- Since this person has a large number of assets including big sums in retirement accounts, this person can quit working (or take a break) at the end of 2023 and live off his Roth IRA. If you have read my prior post, you know the flexibility of Roth IRAs. Of course, this works only for those people who:
- Want to change careers so want to go back to school themselves or start something new, OR
- Are done working and this happens to be a good sweet spot to quit, OR
- Always wanted to take a break for a few years (or one year) and this happened to be the sweet spot.
- It’s important that this should not be a financial strategy in isolation. This has to be holistic life decision. This is because since you are high-income, it makes more financial sense to keep your income and pay for college without financial aid than to rely on financial aid and stopping your income as a financial strategy.
I hope you enjoyed these strategies. Please share any other strategies which I can add to the list.