Liz Weston

LOS ANGELES, Jan 27 (Reuters) – Spiraling college costs can
tempt families to stretch the truth trying to get more financial
aid. These methods carry significant risks and may not even
work.

There are legitimate ways to get better offers (see),
but here’s what you want to avoid:

1. Lying about income

Tempted to “forget” an income source or report lower numbers
than what you actually earned? The chances of getting caught are
fairly high.

Colleges can, and do, compare the numbers you submit with
the transcript of your most recent IRS tax return.

In the past, the U.S. Department of Education required
colleges to verify 30 percent of the Free Application for
Federal Student Aid (FAFSA) submitted, but some choose to verify
100 percent, said financial aid expert Mark Kantrowitz of
Edvisors, a Las Vegas-based education resource network.

Going forward, the department is transitioning to a
computerized risk model to flag potential problems that will
require applicants to provide further proof if there are any
discrepancies.

Just as lying to the Internal Revenue Service carries
substantial penalties, so too does lying on a FAFSA – a fine of
up to $20,000 and up to five years in prison.

2. Hiding assets

Many attempts to keep wealth hidden from the financial aid
process are pointless, said Kantrowitz, who co-authored the book
“Filing the FAFSA.”

Parents with substantial assets often also have substantial
incomes, and high incomes are often enough to rule out getting
need-based aid.

Also, assets tend to leave a paper trail. If you cash out
stocks to stuff money into your mattress, the capital gains will
show up on your tax return. Financial aid officers are pretty
good at spotting discrepancies and inconsistencies, and may ask
you to provide several years’ worth of tax returns and account
statements if they smell something fishy, said Kantrowitz.

Keep in mind that retirement assets are never counted in
financial aid formulas, and a certain amount of non-retirement
assets are also sheltered from inclusion by the FAFSA when
determining your expected family contribution.

The vast majority of families won’t have enough assets to
affect their chances of getting financial aid, said college
expert Lynn O’Shaughnessy of San Diego, author of the book and
Web site “The College Solution.”

3. Buying annuities and life insurance to reduce assets

Insurance salespeople may pitch their products as ways to
make non-retirement assets “disappear,” said college planner
Todd Weaver of Strategies for College, a Hanover, N.H.-based
consulting firm. Some go a step further and suggest you borrow
against your home equity to invest in annuities or insurance
-which is rarely a good idea, since the federal financial aid
formula ignores home equity and private colleges typically cap
how much equity they count.

“People get lured into thinking that assets are the driving
factor” in financial aid offers, Weaver said. “They’re not. It’s
income.”

Where life insurance is concerned, it’s true that financial
aid formulas don’t count the cash value, said college consultant
Deborah Fox of San Diego-based Fox College Funding. But
cash-value policies can be expensive and aren’t a smart purchase
if you don’t otherwise need the coverage, she said.

Annuities also can be expensive and come with surrender
charges that make it costly to get your money back. While
they’re not counted in the federal financial aid formula,
private colleges may count them against you.

“More colleges are counting them,” Fox said. “Annuities are
not necessarily a safe haven.”

Families considering either product should first use an
“estimated family contribution” calculator, like the one atas well as colleges’ net price calculators to see if the
purchase would make a difference. Then they should run the idea
past a fee-only financial planner, a certified public accountant
or another financial adviser who doesn’t stand to make a
commission on the deal.

4. Saving in Grandma’s name

Assets in the student’s name count heavily against financial
aid offers. Assets in the parent’s name count much less heavily.
Assets in the names of grandparents or other non-custodial
relatives don’t count at all, which is why some people have
Grandma open 529 college savings plans for the grandchildren.

That may work okay the first year for financial aid, but
withdrawals from that college savings plan to pay for college
will count as a “student resource” that will significantly
impact the next year’s financial aid offer, said CPA Joe Hurley,
founder of SavingForCollege.com.

By contrast, withdrawals from parent- or student-owned 529
plans usually aren’t reported as income for financial aid
purposes. Typically, Hurley said, it’s best to save in the
parents’ names.

LOS ANGELES (Reuters) – If you know much about college financing, you probably know the basics of improving a financial aid package: Save in your own name, rather than your child’s, fill out the Free Application for Federal Student Aid as soon after January 1 as possible and look for scholarships and other “free money” that can reduce your costs.

But many other strategies can also increase your financial aid. Here are seven of them:

SEEK OUT GENEROUS SCHOOLS

Most colleges and universities do not provide enough scholarships, grants, loans and work-study to pay for all of their students’ expenses. Some, however, are committed to filling 100 percent of those needs, and they are the colleges to seek out if you really want to reduce your costs, says Lynn O’Shaughnessy, author of the book “The College Solution” and website of the same name.

Typing a school’s name into CollegeBoard’s “College Search” function (www.collegeboard.org/) will show you the percentage of student expenses the college meets and the average size of aid packages.

SPEND DOWN STUDENT ASSETS

Before applying for financial aid, you can spend down savings, brokerage and custodial accounts in the student’s name as long as what you buy benefits him or her, says Mark Kantrowitz, senior vice president of the Edvisors network of education resource sites.

The author of the upcoming book “Filing the FAFSA,” Kantrowitz says the spending cannot be for expenses the parent is typically obligated to provide, like food, housing, medical care, etc.

But summer camp, a new computer or tutoring may all qualify. Check with a tax pro.

SEND SOMEONE ELSE TO COLLEGE

Your “expected family contribution” will drop when you have more than one family member in college at the same time, O’Shaughnessy says.

“While (the expected family contribution) might be $30,000 for one child, when you have two in school, the expected family contribution for each child drops to $15,000,” she says.

A smaller expected family contribution typically means more aid per student.

If your kids are close in age, it may make financial sense to have the older one put off enrollment or get requirements out of the way at a cheap community college first.

MOVE MONEY INTO RETIREMENT ACCOUNTS

Qualified retirement accounts such as 401(k)s and IRAs do not count as assets when calculating financial aid, says college consultant Deborah Fox of Fox College Funding.

Maxing out retirement savings opportunities for yourself and your kid in the years leading up to college can help you move money from “countable” accounts to ones that will not affect your aid package.

But do not contribute money you expect to use for college expenses, since withdrawals from retirement funds can trigger taxes and penalties, and will be counted against the next year’s financial aid offer.

PAY OFF DEBT

You can make savings and other non-retirement accounts effectively disappear from financial aid formulas by using the money to pay off debts such as auto loans and credit cards, Kantrowitz says. This also can help you reduce your expected family contribution on the FAFSA, although the private school form will take into account your increased home equity if you are paying down a mortgage

Another way to reduce savings is to accelerate a planned purchase. If you plan to buy a new car in the next few years, for example, you might consider using your cash to do so before the student’s senior year in high school.

CHANGE YOUR CUSTODY ARRANGEMENT

The FAFSA asks applicants to list the income and assets of the custodial parent’s household. In the case of remarriage, the income and assets of the stepparent are included as well, regardless of whether he or she plans to help with school expenses.

Having the child move in with the less affluent parent can result in a larger aid package. In the case of joint custody, the “FAFSA parent” is the one the child spends more time with, so it may be enough to simply extend his or her stay at one household.

LOOK AT THE SIMPLIFIED NEEDS TEST

If your family income is low enough, you may qualify for the Simplified Needs Test, which disregards your assets when computing your expected family contribution.

To qualify, the parents’ adjusted gross income must be under $50,000. All family members must be eligible to file simplified IRS forms (1040A, 1040EZ), exempt from having to file tax returns at all or are eligible for certain federal benefit programs, such as free or reduced price-school lunch, Supplemental Security Income or food stamps, Kantrowitz says.

If your family income is just above the $50,000 mark, you could see a significant increase in aid by lowering it, particularly if there are assets that would otherwise be counted against your student.

(The author is a Reuters columnist. The opinions expressed are her own.)

(Follow us @ReutersMoney or here

Editing by Lauren Young and Lisa Von Ahn)