Income bunching for financial aid

If you fill out a CSS profile, they ask about deferred compensation. If your arrangement is a formal agreement with an employer, it counts as deferred income, and you will need to report it. If it's your own company and you are allowed to set your own salary, then you can do this (but you will probably have to report the value of your company, which will again be factored in.

My wife and I have used an income manipulation strategy similar to this to qualify our daughter for a state based scholarship program (New York State Excelsior Scholarship) in our state of residence. We achieved this despite making over 57% more than the maximum qualifying income for the program.

It takes a thorough understanding of the rules and definitions for each program you are trying to qualify for. In many cases, it also takes years of pre-planning your federal/state tax & financial strategies to pull off successfully. So be sure the benefit to your family is worth the hassle factor and the cost, if there is one.

Step One: Know Your Why & Your Boundaries

College expenses, for the wise, are a temporary problem to solve. Doing this for our daughter was a way we could partly actualize a promise we made to help her graduate her bachelor's degree debt free and not sacrifice our progress to FI along the way. So, we always remember to keep " the main thing, the main thing", which was to prioritize our journey to FI. She can always take out student loans, but retirement loans don’t exist. Not having to live in our daughter's basement as older adults is a bigger blessing to her than paying for college. But if we can have both, why not?

Step Two: Define the Rules

In our case, this scholarship provides full undergraduate tuition at any state school in New York for the first bachelor’s degree (and associates if going through community college first). It has a maximum Federal Adjusted Gross Income limit of $125,000 for the household, which includes the parent and child's income each year. It's an "all-or-nothing" type limit. So, it you make $124,999, you qualify. If you make $125,001, you don't qualify.

Step Three: Understand the Definitions

This scholarship is also based, like the FAFSA, on "prior-prior" year income. Which means there was a two-year moving lag between the "qualification year" and the "use year". So, our child's first academic year in college (Fall 2025 & Spring 2026) will be contingent on our Federal AGI for the 2023 tax year.

Step Four: Develop a Plan & Implement

We learned about how Federal AGI was calculated, and what options (retirement plan(s) capacity – 401(a), 403(b), 457’s in our case) we had available to achieve meeting that target income based on our unique situation. We determined that beginning with the tax year in the middle of our daughter’s sophomore year of high school, that we would begin to shift our retirement contributions from roughly a 20% Roth/80% Pre-tax split to mostly Pre-tax, as needed, to qualify for the scholarship. We did not take on debt or decrease our retirement savings rate. If anything, we significantly increased our retirement savings rate as our primary goal is to reach FI, and extra savings for retirement was viewed by my wife as "also saving for our daughters college". This mindset was particularly motivating to her.

We tracked our taxable income, retirement contributions, and other qualifying expenses that reduce Federal AGI (health insurance premiums, required employee pre-tax pension contributions, business expense deductions, etc.) closely each year.

Step Five: Review & Adjust

We reconciled our excel spreadsheet calculator to our actual tax filings to ensure how we were calculating the Federal AGI was accurate enough to achieve the goal. We regularly work with a professional CPA for our tax filings, so we used knowledge from this relationship to fine tune the way our excel spreadsheet calculator works. This would be important as each year of college financial aid will (typically) be based on a different tax year. We worked this process, rinse and repeat, for each year she will be in college.

The result so far is that we were able to qualify her for this free* money for at least the first two years of her bachelor's degree while becoming debt free (except the mortgage), maintaining at least a ~31% gross annual income retirement savings rate, and increasing our annual income +5% each year. We also did not force cutbacks to desired lifestyle expenses like charitable giving and vacations either.

The idea you have is a valid one that can work, but we learned it’s not an easy one to execute, and you may reach a point where the benefit is not worth the cost or the hassle. I’d scrutinize whether paying interest on debt, like a HELOC, will be a net positive in your plan. Hope this helps!

There have been several episodes on college and FSFA hacking, but I'm not sure if this specifically has been addressed. You can search the main website with the keyword college and listen to them if you think that may help.