6 ways to help your clients maximize financial aid

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When a client has a child attending college shortly, you can almost guarantee that you'll be getting a barrage of questions about financial aid. "Am I eligible?" "What forms do I fill out?" "How can I make sure that I get the most financial aid possible?" The first two questions are pretty straight forward, but the latter can be an opportunity for you to add value to your client.

You can achieve this buy having a handful of tactics up your sleeve to lower their expected family contribution (EFC). Colleges look to see how much a family can spend on education, the EFC, before they award an aid package. The lower you can keep it, the higher their chance of receiving a larger aid package. Below are a few tactics you can use. It should be noted that these tactics are completely legal and simply take advantage of the federal methodology's treatment of family assets and income.

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1. Real estate. This can be a great way to bring in monthly income, while potentially adding $0 to your Adjusted Gross Income (AGI). It can also serve as lodging for your client's college-bound student. This is because real estate, in most cases, allows for a depreciation deduction. You could suggest that your client buy a 3-bedroom condo near campus and rent out 2 of the 3 bedrooms to their child's friends. If this rent were to bring in, after expenses, an amount equal to the depreciation deduction (e.g., $8,000 in income after expenses and a $8,000 deduction), the property adds $0 to their AGI.

Note: You will still need to include the fair market value of the house on your list of assets.

RELATED: How 7 different assets affect financial aid eligibility

2. Capital gains and losses. This applies if your client has stocks, bonds or other investments that would trigger a capital gain or loss. Be sure to explain to your client that they need to be careful about what they sell beginning the January of their child's junior year of high school up until the January of when they are a junior in college. During these years they will more than likely fill out a Free Application for Federal Student Aid (FAFSA) and their assets will affect their aid package. If your clients sell anything at a gain, the package will be reduced. However, some strategically timed losses can be of use.

Example. Bob, your client, has money invested in the stock market. Some of his positions are up, and some are down. With his child attending college soon, you advise him to just sell off the down positions of stocks you don't believe will recover, triggering a $10,000 capital loss. Not only will your client pay less in taxes, you reduce his AGI on the FAFSA form $3,000 every year over the next 3 years and $1,000 in his child's senior year (capital losses can be carried forward). This could lead to thousands of dollars more in federal aid for his child, taking some of the pain away from that $10,000 loss.

3. Social Security. This affects clients who are 62 or older and have a child applying for financial aid. Encourage them, if they can, to delay taking social security. Although they will currently forego monthly income, it will lower their AGI and increase the aid package their child receives.

4. IRAs. There are times when converting a pretax IRA to a Roth makes sense for your client, but if they have a child applying for need-based aid you might encourage them to wait. If your clients are fortunate enough not to have to fill out a FAFSA form, proceed with a conversion. But if they are going to submit a FAFSA, converting will trigger income that needs to be reported and lower the potential aid package.

5. Defer income. If your client's employer allows them any type of deferred compensation, bonuses for example, it merits a discussion. Delaying the payment of these funds until after your client's child finishes college would lower his or her AGI and thus increase the aid package, at least if the institution is using the FAFSA method.

6. Pay down debt. The FAFSA methodology does not take into account your consumer debt. $5,000 in assets and $5,000 in consumer debt means you have $5,000 worth of assets on hand. By paying off a portion or all of your debt, you can reduce your amount of assets and thus increase the amount of aid your child is eligible for. But remember, it is always wise to have a three to six month emergency fund, so only pursue this tactic if that fund stays intact.

While these tactics can potentially increase your client's financial aid package, be sure to remind them that what they receive might not be what they were hoping for. There is no guarantee that the increased aid will be in the form of scholarships or grants. It could be made up entirely of loans, which will have to be repaid by either your client or their child.

Note: Colleges using the Profile methodology for financial aid might reduce the effectiveness of these tactics