What you're trying to do is wonderful, so kudos to you. Unfortunately, there is no clear or easy answer, but I can tell you a little bit about the federal financial aid formula so you can make a better decision based on your financial situation.
The FAFSA looks at your personal financial situation and creates what's called the EFC, or Expected Family Contribution. The EFC is impacted by four things:
- Student Income (50%)
- Student Savings (20%)
- Parent Income (22 - 47%)
- Parent Savings (2.6 - 5.64%)
From the FAFSA form:
Answer all the questions in Step Four even if you do not live with your legal parents (biological, adoptive, or as determined by the state [for example, if the parent is listed on the birth certificate]). Grandparents, foster parents, legal guardians, widowed stepparents, aunts, uncles, and siblings are not considered parents on this form unless they have legally adopted you.
Student assets and income have by far the greatest impact on the formula. As a caregiver but not as a parent, any money you use to help pay for college will be considered as student income for the given tax year.
This is bad if you need to maximize federal aid, particularly in the early years. However, it can be good if you only contribute in the last two years, because the FAFSA looks at the "prior-prior" year return. So if you're filing the FAFSA for the 2017-18 academic year (you can file as early as October 1st now, and you should), you will be using your 2015 tax return.
This is confusing, so let me try and make it more clear:
Scenario 1: You adopt
Assets and Income are counted in accordance with the federal aid formula each year with you as parents. It's relatively straightforward, or as straightforward as the financial aid process can be made to be.
Scenario 2: You delay adoption until post-graduation.
In this case your assets and income are not counted in the financial aid formula at all until you start contributing. There may be some issues since your great niece does still have parents; you'll have to speak to someone with background on 3rd Party Custodial Parent status with expertise in Financial Aid. I strongly recommend contacting the financial aid offices of a few of the schools she is considering to get their take. Be 100% transparent and up-front in explaining your situation. The financial aid staff are there for exactly this purpose: To help you.
The problem here is: If you don't contribute, how are you financing those first couple years? Does your niece have sufficient income? If not, is it more valuable to have the grants, scholarships, and loans, or your assistance as parents (you can figure this out by doing the math and running through the financial aid calculations, though I'd suggest contacting a financial aid expert).
Your niece could also consider attending an inexpensive two-year school, then transferring into a four-year school to finish out her degree. This is an increasingly popular and practical option. After all, employers are really only looking at the name, not how you got there.
Scenario 3: You adopt at some point during the college years
There might be some advantage to this, but I cannot think of any off the top of my head. A financial aid professional might have some pointers here.
So let me give you some tips: Do your homework. Read the FAFSA document cover-to-cover, fill it out, and go through the process. Ditto to the CSS Profile. Visit and pore over all of these resources:
This is a lot of research, but it's worth it. Studies have shown the time invested in learning about this process and applying for scholarships and aid to be EXTREMELY efficient relative to all but the highest paygrades. The effort will pay for itself.
You can also listen to Lauren Gaggioli's podcasts, in particular this one. I would queue them up on Stitcher when I did my workouts or was driving somewhere. She's got some great content; pick through and find those that apply to you.
Last thing (I swear), federal financial aid is only one part of the financial aid process. There is also the CSS profile, and every school has its own proprietary formula to determine how much students qualify for. So as I said before, contact the financial aid office. Contact every school that she's considering well before applying. Talk to them and learn everything you possibly can.
VP, Research & Development
This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.