Long-Term Strategies
For financial-aid purposes, the most crucial year is the one that begins on Jan. 1 while your child is a junior in high school—the "base income year." During that time, and throughout college, income earned or received is counted more heavily than assets in the financial-aid formulas. Try to avoid taking retirement distributions or realizing large capital gains during that period. Load up on contributions to retirement plans before the base and college years, because assets in those accounts aren't counted in the aid formulas.
Some families may want to defer converting an IRA to a Roth IRA, even though new laws now make it possible for wealthier taxpayers to take advantage of the conversion. Many financial-aid offices may use the income generated from the conversion to reduce the students' eligibility for need-based aid—unless parents appeal the offer through professional judgment.
Since financial-aid forms ask parents to list the funds in their accounts the day they fill out the forms, aim to draw down those accounts as much possible before filing out the paperwork. If you were already planning to make a big purchase—say, a new car or computer—just buy it sooner.
Spend down assets in the student's name first, since aid formulas count student assets more heavily than parental assets. Custodial accounts,such as UTMAs and UGMAs, can also be liquidated with the proceeds transferred into a custodial 529 plan, which are currently counted as a parent asset on the Fafsa form.
Some families may want to consider margin loans, passbook loans (which use savings accounts as collateral) or a home-equity loan to help pay for college since such loans reduce net assets in the aid formula, says Mr.Chany. If, for example, you have a $20,000 stock portfolio and a $5,000margin loan and have no other investments to report, you'd report $15,000 as the figure for your assets on the Fasfa. A major drawback:If the stock market declines drastically, you may be asked to put up additional stock as collateral or pay back part of the margin loan.
Another strategy: Use one of the more than two dozen "prepaid" 529 plans, which allow families to make an upfront payment in exchange for future tuition contracts or credits. The tuition guarantees generally apply to state schools in the state where they are offered, though you can use the money to help pay for out-of-state or private schools. Although many prepaid plans are operating in the red, for now they are still paying tuition as agreed. But the fine print in some state contracts gives them some wiggle room to pay out less than the promised amounts,so read it carefully.
As Steve Berenson's kids got closer to college, he sold some of his holdings in stock-index funds to buy contracts in the Independent 529, a prepaid plan with partnerships with more than 270 private colleges. With his son, Jacob, set to attend one of those schools—Kalamazoo College in Michigan—this fall, he was able to dodge some of the recent tuition spikes.
The school also offered Jacob a $17,000 annual scholarship, and Mr. Berenson, a 47-year-old personnel manager in Vienna, W.Va., recently paid off his mortgage. "I timed it so that I would be freeing up cash flow," he says.
Perhaps the most effective tactic is to find a school that really wants your child. Barry Evans of Carmel Valley, Calif., says his and his wife's decision to send their daughter, Paige, to Southern Methodist University in Dallas was swayed in part by the scholarship money the school offered. "My perception is that early on in the process, SMU decided they really wanted her," he says.
Mr. Evans also netted an additional $6,000 grant by approaching the head of the department that Paige, who just finished her freshman year, was interested in. Today, the school is covering slightly less than half of the roughly $50,000 annual cost through a mix of scholarships and grants.
Paying Up
College costs—including tuition, room and board and mandatory fees—are at all-time highs, although schools say they're boosting aid. Here is a list of the 10 most-expensive schools for the current 2009-10 year,along with next year's costs.
Source: WSJ analysis based on data provided by the College Board; rankings based on 2009-2010 costs.
* Sarah Lawrence College
2009-10: $55,788
2010-11: $57,384
* Georgetown University
2009-10: $52,161
2010-11: $53,006
* New York University
2009-10: $51,993
2010-11: $53,588
* George Washington University
2009-10: $51,775
2010-11: $53,025
* Johns Hopkins University
2009-10: $51,690
2010-11: $53,690
* Columbia University
2009-10: $51,544
2010-11: $57,000 to $59,000*
* Vassar College
2009-10: $51,470
2010-11: $53,270
* Wesleyan University
2009-10: $51,432
2010-11: $53,976
* Trinity College (Conn.)
2009-10: $51,400
2010-11: $53,380
* Bates College
2009-10: $51,300
2010-11: $53,300
*
* *Reflects estimated costs provided by the school's financial-aid office; final costs to be set later this year. Note: Landmark College and Columbia University's School of General Studies,with 2009-10 costs of $53,900 and $51,930, respectively, were excluded because their programs are geared to nontraditional students.
Write to Jane J. Kim at jane.kim@wsj.com
