Managing Your Money

Income vs assets and impact on financial aid

Go to any college fair and you are likely to hear parents talk about how difficult it is to pay for college. With tuition at many Boston-area colleges topping $50,000, a family with one or two college age children can find themselves facing huge bills. Often you hear people say "I am not even bothering to save for college because it will just count against me for financial aid." While many other parents shake their heads in agreement, not saving for college is actually pretty poor advice.

That is because the amount of financial aid you will receive depends primarily on your income -- not your assets. If you make $100,000 per year, a certain percentage of that income is assumed to be available for tuition. It matters very little whether you have $50,000 saved in the bank or $10,000 saved in the bank. Income is very definitely the big driver in the financial aid decision. If your income is high enough, you will be responsible for paying a very high percentage of your child's tuition and if that is (or is going to be) the case, you need to have some money saved.

Since income is the big driver, it pays to "manage" your income to the extent that you can. If you are expecting an inheritance (which is not taxable but must be listed on the FAFSA) or you are thinking of doing a Roth conversion (which generates taxable income), it would be wise to "schedule" those events in years that are not being included in financial aid calculations. If you have a choice, these things should be done/executed in the years that your children enter their junior year in high school or earlier. That is because the "base year" for financial aid purposes is the year before your child starts college. As an example, if you have a child who will be entering college in September 2012, your base year for financial aid purposes is 2011. If you have any "unusual" income in that year, it may adversely impact the aid you receive. Of course, some "income events" cannot be timed and if you find yourself in one of these situations, you can and should write a letter explaining how your income is "off" that year.

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