posted by: Radnor Financial Advisors
The cost of college is one of the most important concerns many families face. Even those who save considerably, discover that without some additional form of aid, their kids may be limited in their choice of school. However, with proper planning it may be possible to tailor a strategy that will maximize financial aid eligibility and minimize out of pocket costs or the need for student loans.
Although calculating financial federal aid eligibility is complex, developing an understanding of how assets and income are factored in to the calculations is a helpful first step to developing and implementing an effective financial aid strategy. Most families applying for need-based financial aid need only complete the Free Application for Federal Student Aid form (FAFSA). FAFSA is used to determine federal financial aid eligibility, grants, and scholarships for most state and private institutions. Roughly 400 schools in the US also require students to complete the CSS Profile in addition to FAFSA in order to apply for aid. Both forms are available for completion online (FAFSA ) (CSS Profile).
Both applications collect family financial information in order to determine the expected family contribution (EFC), or minimum amount a family is deemed to be able to contribute toward the cost of college. The amount of aid a student is eligible for is the cost of attendance at the school less their EFC. The EFC accounts for variables such as size of family and number of college-aged children (both are treated favorably in terms of decreasing the EFC), along with income and assets for the parents and students (which are the key variables in calculating EFC). The FAFSA and CSS Profile gather similar information, although the CSS Profile formula factors in additional items such as home equity and businesses valuation in determining EFC.
The FAFSA and CSS Profile are available in October of a student’s senior year of high school and each year thereafter until the year before they graduate from college. However, the income figure used to determine the level of need is based on the two- year’s prior tax return. For example, those applying for 2019-2020 financial aid will use 2017 tax return information to complete the application.
Parental income is the most important factor for financial aid eligibility, as the EFC formula for FAFSA and CSS Profile consider up to 47% of parental AGI (on a progressive scale depending on AGI amount) in determining the EFC. In addition to income, parental non-retirement assets are factored into the calculation at up to 5.64%. In comparison, up to 50% of student income and 20% of student assets are included in the EFC calculation. Worthy of note, retirement assets are NOT included in the EFC calculation, while other assets such as home equity, non-qualified annuities, and value of small businesses are also excluded from FAFSA (although they are included in the CSS Profile calculation).
Given the parameters of the EFC calculation, there are several ways to improve upon financial aid eligibility:
In addition to the above suggestions for need-based aid, students and parents should also fully investigate the types of merit-based aid, grants, and loans that may be available to them directly from the school. Schools typically base aid packages on uniqueness and desirability of students to the school, which can result in considerable variability of aid packages from one school to another.
In summary, college is expensive and costs continue to grow. College funding is an extremely important and extremely complex topic for the majority of families. Given the number of variables at play and complexity, even minor differences in underlying financials can significantly impact a family’s aid eligibility and ultimate costs. As such, it is critical to develop a comprehensive strategy for college savings and financial aid to assure you maximize your student’s financial aid eligibility.