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Parents need to be wise about how they will pay for the increasingly high costs of college. That means many families should be applying for financial aid 鈥斕齛nd preparing their finances to get the most aid possible. With smart college planning, you can maximize your student鈥檚 financial aid eligibility.

Types of aid

First, there are two main types of college aid: merit aid and need-based aid. Merit aid is straightforward 鈥� it is based on academic and extracurricular achievements. Students who excel in academics, sports or the arts can be awarded merit-based scholarships directly from their schools or through other institutions. Online tools such as听听can help students seeking听.

Need-based aid is more complicated. It depends on the student鈥檚 financial circumstances and can take the form of grant money, loans or work-study. Many affluent families assume that their children will be ineligible for need-based aid, but it often makes sense to apply anyway. By taking the right steps before the college-funding years, even affluent families may still qualify for a significant amount of aid. Plus, those who don鈥檛 qualify will still need to go through the federal student aid application process to receive federal loans.

Because finances are generally not considered for merit aid eligibility, the financial preparations you do will impact your student鈥檚 eligibility for need-based aid, whether it is federal or institutional.

Applying for need-based aid

To apply for federal need-based aid, families must complete the听听(), which is administered by the government. To apply for institutional aid from almost 400 schools and programs, students must also complete the, administered by the College Board.

These forms collect information about your family鈥檚 finances to determine your expected family contribution (EFC), the minimum amount your family is deemed able to contribute toward the cost of college. The amount of need that a student is eligible for is the cost of attendance less the EFC. The EFC takes into account factors like family size and the number of children in college, but the key drivers of aid eligibility are the income and assets of the parents and the student. Note that the FAFSA and CSS Profile use similar formulas, but the CSS Profile considers additional factors like home equity and businesses.

The FAFSA and CSS Profile are available in October of your child鈥檚 senior year of high school and each year thereafter until the year before they graduate from college. However, the income used to determine the level of need is based on the previous year鈥檚 tax return. For example, if your child starts college in the fall of 2017, your income will be based on your 2015 tax return. (These are听, which used to open in January and require the tax return information from the year immediately prior to enrolling.) The听is in June, but deadlines vary for your state, school and the CSS Profile.

How income and assets are counted

For most families, the parents鈥� income will be the most important determinant for aid eligibility. Under the EFC formula for the FAFSA and CSS Profile, up to 47% of parents鈥� adjusted gross income (AGI) is considered available for college funding. (Since this is progressive and there is an income allowance, it typically averages 20% to 25% of AGI for most families.)听听are counted, with a small allowance as well. Students are expected to contribute as much as 50% of their income and as much as 20% of their assets.

It鈥檚 important to note that your retirement assets are not counted in the calculation of EFC. Other assets like the value of small businesses, home equity and nonqualified annuities are not included on the FASFA either, but they are on the CSS Profile. However, in some cases, home equity is capped at 1.2 times the parent鈥檚 adjusted gross income on the CSS Profile.

Also note that parent and student assets are based on their market value at the time that you complete the aid forms. However, remember that you鈥檒l be completing the financial aid forms annually, so as your financial situation changes so will your student鈥檚 aid eligibility.

Ways to increase aid eligibility

There may be steps your family can take to increase your child鈥檚 chances of receiving the most student aid possible. Here are some strategies to consider:

• Max out your retirement accounts.听While your child is younger, you can build up significant savings in听, which will not be included in determining aid eligibility. In the year your student applies for aid, you鈥檒l need to add contributions back into your income, but the assets still won鈥檛 be included for aid. Assets in a bank or brokerage account, on the other hand, would reduce aid eligibility.
• Pay down debt.听Use taxable accounts like bank or brokerage accounts to pay down expensive credit card or student loan debt. This not only reduces your interest costs, but reduces your taxable assets, which can help increase aid eligibility. Since home equity is included for the CSS Profile, paying down your mortgage may not be the best strategy. But remember, FASFA does not consider home equity in determining aid and many CSS Profile schools place a cap on how much is counted.
• Reduce income.听If possible, it helps to limit your income in years that are counted for financial aid. This is difficult to do if you have a regular salary, but you can watch out for selling assets that would trigger a large capital gain in your taxable accounts or look for ways to offset them with capital losses.
• Do not open custodial accounts for your children.听Student assets are counted more heavily for financial aid purposes. If you already have custodial accounts, consider moving those assets to a听听for your child instead. Liquidating existing custodial accounts could result in capital gains, but you may still save more money in the long run. Since 529 assets are typically included at a lower rate than custodial accounts for financial aid, you鈥檇 want to run the numbers to see whether听it is beneficial to make the move.
• Plan ahead for family contributions.听Plan carefully if grandparents or other family members want to contribute toward college expenses. The amount and timing of this type of contribution can materially impact your child鈥檚 aid eligibility, so it鈥檚 critical to optimize such assistance.

Parents should also consider how aid is affected when they have more than one child in college. For instance, with two children in college, the parent鈥檚 expected family contribution is not twice what it would be for one child.听In fact, the parents鈥� expected contribution is reduced for each child, though the percentage may differ on the FAFSA and CSS Profile.

Aid packages

When a student qualifies for a certain amount of need-based aid, it doesn鈥檛 necessarily mean that the student will receive that much in the form of a grant. The college or university might not meet 100% of the student鈥檚 need or may offer a combination of grant money, work-study and/or loans. Schools also base some of their aid package decisions on how desirable the student is to the school, so it鈥檚 possible that the same financial information could produce very different aid packages from one school to the next.

You鈥檒l find the information about the type and amount of aid the school is offering your student in financial aid award letters. It鈥檚 important to be sure you fully understand each type of aid being offered. You can compare award letters from different schools using听. If you are not happy with your aid results, you can always appeal, especially if your financial situation changes.

Also, keep in mind that to receive federal loans, you have to file the FASFA. Therefore, even if your income is too high for aid, but you would like your child to pay for a portion of college costs through federal loans, you should still complete this form.

Finding your strategy

听and admissions experiences are unique to each family. There are so many variables that even minor differences can have a dramatic impact on a family鈥檚 aid eligibility. Thus, it鈥檚 best to base your听听and decisions on your situation only.

In some cases, the cost of a bad decision can be painful, especially when parents end up spending money on college at the expense of their own retirement. To develop a sound financial aid strategy, I recommend working with a fee-only financial planner who understands the process and the potential pitfalls. Applying for financial aid is complicated, and the wrong strategy can result in paying thousands of dollars extra for college.

听is a financial planner at听听in Raleigh,听North Carolina.听A summary of this blog is also available听听on the Financial Symmetry website.听Learn more about Mike听on NerdWallet鈥檚听.

The article听听originally appeared on听.