New FAFSA Rules Create New College Financial Aid Strategies

"Deciding not to take an IRA distribution, for example, in November or December and waiting until January of 2017 could considerably help with their senior year financial aid package," says Sommer.

Time 529 College Saving Plan Distributions

There are two key points to remember when filing the FAFSA. One, the expected family contribution to finance the cost of college is based on a calculation that gives much less weight to parents' assets (5.64%) than students' assets (20%). The lower the EFC, the bigger the potential need for financial aid. Two, qualifying distributions from 529 College Savings Plans, whether owned by a parent or a student, are considered a parental asset, while distributions from a 529 plan owned by a grandparent are considered a student's income.

Given the two-year lookback, then, families can maximize their chances of a student receiving financial aid by using parental and student-owned 529 plan distributions during a student's first two years of college and grandparent-owed 529 plans during the last two years of college. Maximize Gifting Opportunities

Grandparents — and others — have additional options that won't affect aid eligiblity if used to finance the last two years of a student's college education. They can give unlimited amounts of money directly to a college on behalf of a student without triggering a gift tax while simultaneously reducing their potential estate tax liability.

They can also gift appreciated assets to a student. If the student is 24 or older and in the 10% or 15% lower tax bracket, the gains collected when he or she sells that asset won't be taxed because there is no capital gains tax for those in the lower tax brackets. Students younger than 24 who are single and attending school full time, however, would be subject to their parent's income tax rate for those gains, under the "kiddie tax" rule.

Spend Custodial Account Assets Two Years Before Freshman Year

A custodial account in the name of a child, known as the Uniform Gifts to Minors Act (UGMA), account, is considered a student asset for purposes of FAFSA. In order to limit the impact of those assets on potential financial aid because they have a heavier weighting in FAFSA calculations than parental assets, families may want to spend down those assets two years before a student's freshman year. Under the law, those assets must be spent on products or services that benefit a child, so they can be used to pay for summer camp, laptop computer or academic tutoring, for example.

Another strategy, according to Sommer, is to liquidate the custodial account, which would trigger capital gains tax on any appreciation, and invest the proceeds in a 529 plan whose assets will be considered parental assets for purposes of the FAFSA and whose earnings wiil compound on a tax-deferred basis and distributions will be tax free.

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