In Part 3 of this series, we addressed how colleges calculate how much they think you can pay. Of course everyone wants to know, how can I pay the least amount for my college of choice?

Unfortunately, as I’m sure you can guess based on the previous articles in this series, that’s not a straight forward thing that I can just outline for you in a couple of quick bullet points.

If you’re a do-it-yourselfer, by far the best material I’ve read is in The Princeton Review’s “Paying for College, 20XX”, whatever the current version is of this book when you’re reading this article. It’s a hefty book, at 368 pages for the 2021 version, and none of it is superfluous.

And then you have to know what your college of choice uses for their funding calculation methodology. For example, the FAFSA doesn’t include the parents’ home equity at all in their calculation, where as the CSS Profile schools will include as eligible assets your home equity after their multiplier of your income of choice.

In general, student assets and student income will be very heavily assessed on a percentage basis, all the way up to 50% for student assets and 20% for student income. Parental assets are assessed at just under 6% per year and there’s an exclusion amount to allow you to keep an emergency fund (varies based on the age of the oldest parent in the household); fortunately 529 plans are counted as parental assets, but unfortunately UTMAs are counted as student assets. Parental income, unfortunately, can be assessed at up to a rate of 47%; which after taxes likely leaves the parents with 1/3 of their pre-tax income on additional dollars earned like a bonus, 2nd job, mom heading back to work, or putting in a lot of overtime, which is quite hard to stomach.

If you choose to take out loans instead of using assets to pay for college, those assets will be assessed again the next year when you have to complete your update paperwork.

Assets are inventoried each fall for the following academic year. Income is assessed using the prior-prior year’s tax return. So you need to plan ahead if you’re going to make any of these income or asset moves, because schools will be looking over your shoulder to see how much they can take, starting mid-way through your student’s sophomore year of high school. If your student is in 9th grade or earlier, you’re in a great position to be planning ahead and making changes.

Timing of any gifts you might receive from well-meaning relatives is important too, receive them too early and colleges will expect you to provide that level of cash flow to them for future years as well.

Conclusion

The key is to know what schools you might consider, identify the methodology they use, and then set up your financial future according to the rules they play by. Just like deciding whether to pay the taxes for Roth conversions in any given year, where the goal isn’t to minimize this year’s tax bill it’s to minimize your lifetime tax bill, for paying for college your goal is to maximize how much of your assets you get to use for the long term benefit of your family.

Now you know the general plan is work on paying off your house, invest in your retirement accounts, don’t transfer parental assets to the kids, and don’t try to lock assets up by putting money away for your kids in a trust. If you have large expenses that will burn up your cash on hand, pay for those before you complete the FAFSA each fall prior to the school year in question. Delay receiving income until after the college assessment years, if you can.

Next up, the final installment in our college funding series, Part 5 on getting your students through with school faster.