Investment Moves that Increase Financial Aid

August 7, 2010 | By Steven DiGregorio

Financial aid season for college students doesn’t kick off for another five months, but parents should take a close look at their investments and assets now to help maximize their child’s aid eligibility.

The Free Application for Federal Student Aid (FAFSA), which students must fill out in order to apply for federal, state and some school aid, determines the expected family contribution (EFC) – the amount that your family could be responsible to pay out of pocket toward college education. The lower the EFC, the more financial aid a student is likely to receive.

Positioning for Financial Aid

Parents who are considering selling investments, like stocks or mutual funds, or real estate should consider the impact their capital gains or losses will have on their child’s financial aid eligibility. In general, capital gains increase a family’s adjusted gross income (AGI), which tends to decrease their financial aid. In addition, this year presents a new opportunity for high income-earning investors to roll over their Individual Retirement Account (IRA) into a Roth IRA, which can provide plenty of tax perks but can hurt their request for financial aid.

Here are four investment moves that can impact the amount of financial aid a student gets.

Rolling an IRA into a Roth IRA

This year, a new opportunity became available to retirement savers, which permits those with more than $100,000 in annual modified gross income to roll over savings from a traditional IRA into a Roth IRA. With a Roth IRA, you’ll pay taxes upfront and you can withdraw tax free, assuming you’re at least age 59 1/2 and have one Roth IRA account open for at least five years. The upshot here is if you think your personal tax rate will be higher when you retire, it might be better to bite the bullet now and pay the taxes while you’re in a lower bracket. The drawback is that you’ll have to pay full income taxes on the conversion. And for individuals with children about to enter or in college, this rollover could lead to a smaller financial aid package. That’s because the entire amount that gets converted to the Roth IRA will show up on their tax return as income.  This could be extremely damaging for a family that would [otherwise] qualify for financial aid.

There is a way for parents to accomplish a rollover without sacrificing their child’s aid eligibility. The Department of Education is permitting colleges to ignore this conversion when they’re reviewing a family’s income for financial aid purposes. The ultimate decision will be made by each individual college, and parents will need to contact the school to request that they ignore this rollover as part of their income. Otherwise, there’s a greater chance that the school will take the rollover into account.

Managing capital gains and losses

Given the recent volatility in the U.S. markets, it’s likely that many investment portfolios have taken a hit. Although selling a stock at a loss is never ideal, such a move can help increase the amount of aid your child will receive.

Selling at a loss may only make sense if the individual isn’t planning to hold on to the investment for the long run. However, if you were investing for the short term or if you were hoping to use this money to help pay for college tuition, it might be time to sell. You may be better off to sell sooner rather than waiting for the future when you may have gains that would count against them in the financial aid formula. It might be better to take the loss that would be deducted from your earned income on their tax return and will lower the adjusted gross income.

Selling an investment at a profit will increase your AGI, which would likely lower the amount of financial aid  you can get. However, taxpayers in the 10% or 15% tax brackets who have long-term capital gains (requires a holding period of more than a year) pay zero taxes through the end of 2010.

Consider impact of selling real estate

Homeowners thinking about selling their home may or may not impact their child’s financial aid eligibility depending on how much their property fetches.

Currently, there is a capital gains exclusion of gains up to $250,000 in profit per person or $500,000 in profit per couple who files jointly; the sale doesn’t show up in your AGI unless the home sells and you’re left with a gain higher than these amounts. Homeowners must have owned and lived in the home for at least two years. (Sales of investment properties show up on your AGI regardless of how much they sell for.)

To determine capital gains, the cost basis, which is the price at which you bought your home and the cost of the improvements that you made, is subtracted from the selling price (including commission).

Shifting assets from child to parents

Parents often move assets into their children’s names for tax purposes – but this tactic will almost certainly hurt them come financial aid time. The federal needs analysis formula assesses child assets at a rate of 20%, while parent’s assets are assessed at up to 5.64%. The EFC will probably be higher when the assets remain in the child’s name and they could lose out on need-based aid, assuming they qualify.

One option is to move the assets from the student to the parent’s name before filing the FAFSA. Or parents can move some of their cash into their child’s 529 plan, which is treated as a parental asset. This money, however, will have to be used for educational purposes; otherwise, when you withdraw, the earnings will be taxed as ordinary income and hit with a 10% tax penalty. Also, such a move will probably make the most sense for someone moving cash from a bank account into a 529 plan.

* Consider the investment objectives, risks, charges and expenses of the 529 Plan carefully before investing.  Consultation with a tax adviser is recommended as Compass Asset Management Group. LLC does not provide tax advice.

For more information contact us at 845.563.0537 or

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.


Tags: 529 plan, aid eligibility, college, college students, Department of Education, education, EFC, expected family contribution, FASFA, financial aid, investment strategies, investments, IRA, news, ROTH, school, shifting assets, student loans, students, tax return, tuition

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STEVEN M DIGREGORIO is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
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