Figuring out what you are expected to pay for college can be a confusing and overwhelming task. You face many different questions and for some people stress begins to kick in. How much will college really cost? Will I be able to afford it? How will I pay for college? Will I need to take out student loans? How much financial aid will I qualify for? The list of questions goes on and on but these are some of the thoughts that tend to come to mind first. Determining the amount of financial aid you will qualify for begins with filling out the Free Application For Federal Student Aid (FAFSA).
The FAFSA
The FAFSA is the official form used to request federal, state and school assistance in paying for college, which helps you determine how much need-based financial aid you qualify for and how much non-need-based aid you can receive. Every year millions of college students and parents fill out this form. The FAFSA requires a variety of the parents’ and students’ information, including monetary assets as well as identification questions and a series of other questions pertaining to personal information. Some examples of personal information that must be provided are names, address, Social Security number, date of birth, etc. Some examples of financial information needed includes adjusted gross income (AGI), bank account balances, investments, etc. Note that retirement assets are not included in the EFC calculation and they do not affect any potential financial aid. Under the EFC formula up to 47% of the parents’ adjusted gross income is considered available for college funding. Although the maximum percentage is 47% it is typically between 20% to 25% that is considered to be available for college funding. Up to 5.64% of investment assets are accounted for and students are expected to contribute up to 20% of their income and up to 50% of their assets.
How Do Assets Impact Student Aid
When it comes to the FAFSA, some types of assets have to be reported — and others don’t.
Reportable assets (you are required to list these on your FAFSA)
- Cash – Checkings and Savings Accounts
- Investments – CD’s, Brokerage accounts, stocks, bonds, mutual funds, hedge funds, private equity, vested portion of stock options or restricted stock, UGMA and UTMA accounts, and other investments
- Real Estate – any real estate owned other than the family’s principal place of residence
- 529 Accounts
Non-reportable assets (you are not required to list these on your FAFSA)
- The value of the principal place of residence
- Any small business owned and controlled by the family (if it has less than 100 full-time employees
- Qualified retirement plans such as 401(k) plans, 403(b) plans, pension plans, annuities, traditional IRAs, Roth IRAs, Keogh, SEP and SIMPLE plans.
- Life insurance policies, including cash value and whole life insurance policies.
- Personal possessions, such as clothing, furniture, books, cars, boats, computer equipment and software, television and stereo equipment, music collections, jewelry, coin, stamp, art, and wine collections.
The form is filled out with information based on the prior year’s tax return. Since the FAFSA relies on the prior year’s tax return it if best if you complete the prior tax year’s return before filling out the application. The process of filling out the form can be tricky and requires attention to detail in order to ensure the student receives the most financial aid possible. Annually the FAFSA provides financial aid to nearly 13 million students who qualify for more than $120 billion in federal grants, work-study funds, and loans.
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The FAFSA is not a one and done process. To receive financial aid annually the students or their parents must submit a new FAFSA form every year the student is enrolled in classes. The student and their parents’ financial information and personal information are then evaluated and financial aid for the new school year is given based off of the new FAFSA submitted. There are two ways to submit the FAFSA, one way is by mail and the other option is to submit it online. The easier and more beneficial way to fill out the FAFSA is online. Choosing to submit the form online has advantages such as including space to list 10 colleges rather than four and it has a faster response time. The online system is also a better resource to catch any errors on the application. Although this process can be strenuous one nice feature about the FAFSA is that it is free to submit.
It is important to note that the FAFSA must be submitted between January 1 and June 30 for the upcoming year otherwise no financial aid will be considered. Although the time frame is a range of six months, each state widely varies their deadlines. Some states base their deadline on postmark date, some are based on the date received and some are based on the date processed. It is key to know this information before submitting your FAFSA.
The FAFSA uses a calculation by taking the cost of attendance (COA) of the college you are looking at and subtracting the expected family contribution (EFC). The COA is the estimated total cost of attending a particular school for one year. The included expenses are tuition, room and board, books and supplies, personal expenses and transportation. An educational institution’s COA can differ for students based on various factors such as in-state tuition vs. out-of-state tuition or if a student lives on-campus or off-campus. Other factors that may cause the cost of attendance to vary for students are travel expenses, choice of major, and extracurricular activities. The EFC is the amount of money that a student’s family is expected to contribute to college costs for one year. In order to calculate the financial need for a family the calculation takes into account their income, assets, the size of current household and the number of family members currently enrolled in college.
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Typically, the way the EFC works is that the lower the EFC, the higher the family’s financial need. Therefore, if a family’s EFC is low the student is more likely to have greater eligibility for federally sponsored financial aid programs. Some of the financial aid programs offered include Pell Grants, Perkins and Stafford Loans, and Federal Work-Study Programs. Once the FAFSA has been submitted the family receives a student aid report (SAR). The student aid report is a document that includes the official EFC value. Once a family knows their EFC value it is easier to determine how much they will need to cover in college expenses.
Net Price Calculators
There are many online resources you can access to estimate what your EFC will be. Most colleges also offer an EFC calculator on their own website. Let’s take a look at an example of one of the online EFC calculators offered to see the breakdown of the EFC calculation. In this example we will use a fictional family who is made up of two parents and three children. The calculator will ask you to enter in some basic family and financial information. We will model this example after 2019 tution for two different schools: an in-state public school, Rutgers University, and a private school, Princeton University.
| Family Information |
| Number of Parents – 2 |
| Age of oldest Parent – 50 |
| Number of College Students – 1 |
| Total People in Household – 5 |
| State of Residence – New Jersey |
| Parent Income |
| AGI – $200,000 |
| Retirement Contributions – $36,000 |
| Child Support – $0 |
| Tax-Free Income – $0 |
| Parent 1 Income From Work – $150,000 |
| Parent 2 Income From Work – $86,000 |
| Income Tax Paid – $50,000 |
| Parent Assets |
| Bank Accounts – $40,000 |
| Investments – $50,000 |
| Real Estate – $250,000 |
| Trusts – $0 |
| College Plans – $35,000 |
| Business/Farm – $0 |
| Other – $0 |
| Student Information |
| Student Income – $0 |
| Student Assets – $0 |
| Cost of Attendance (Rutgers) – $28,482 |
| Cost of Attendance (Princeton) – $73,450 |
EFC Estimate
| Rutgers | Princeton |
| Cost of Attendance – $28,482 | Cost of Attendance – $73,450 |
| Expected Family Contribution (EFC) – $66,747 | Expected Family Contribution (EFC) – $66,747 |
| Estimated Financial Need – $0 | Estimated Financial Need – $6,703 |
The same inputs are used to calculate the EFC for Rutgers and Princeton but what makes the two vary is the cost of attendance. In the example with Rutgers the cost of attendance is below the EFC value. Since the EFC exceeds the COA the estimated financial need is $0 because this calculation assumes the family earns enough money and has enough assets to cover the COA for Rutgers. On the other hand, the cost of attendance for Princeton is much higher at $73,450. Since the COA exceeds the EFC the difference between the COA and the EFC is calculated. The result is $6,703 which is the family’s amount determined to be their need-based aid. If the child chooses to attend Princeton the $6,703 estimated financial need will most likely be covered by financial aid. The EFC is the minimum amount your family is deemed able to contribute toward the cost of college.
Everyone wants to maximize their estimated financial need and there are a few different ways to do that. Strategizing the way you save for college and how you handle your assets can make a difference in your EFC. If you are saving money for your child’s education it is best to save money in the parent’s name or a 529 plan rather than the student’s name. The reason for this is because now there is an age threshold of 18, 19 and 24 for the Kiddie Tax. Utilizing a 529 college savings plan is a great tactic to save for college but try to avoid these plans if they are owned my a grandparent, non-custodial parent or anyone other than the student or a dependent student’s custodial parent. Again, opening up a 529 plan is most beneficial if it is parent-owned.
Opening a UGMA or UTMA account for a child can actually be harmful to your EFC because this is viewed as the student’s asset. Once again the custodial 529 plan yields a more favorable financial treatment but a 529 can only be used for educational expenses whereas a UGMA or UTMA account can be used for anything.
If it’s possible you should avoid receiving loan proceeds before filing for the FAFSA. Examples of loan proceeds include a home equity loan or a line of credit. Another strategy is to make the maximum contributions to your retirement plans. Even though making these maximum contributions does not reduce total income on the FAFSA the base year contributions are added back as untaxed income. This allows you to reduce reportable income.
Spending your assets strategically is another way you can impact your EFC. If the student has assets of his or her own, such as a UGMA or UTMA account for example, spend theses first before touching any of the parents assets. It is estimated that as a dependent student, every $10,000 increase in your income results in up to a $5,000 decrease in need-based financial aid whereas every $10,000 increase in your parent’s income causes approximately a $3,000 decrease in need-based financial aid. If you are expecting to have some necessary expenses such as home improvements or purchasing a car make these purchases before filing the FAFSA. These expenses will help reduce your reportable assets which will also reduce your EFC. Sticking with the theme of decreasing reportable assets, this is a great time to pay off or reduce any outstanding debt you have such as credit card balances, student loans, car loans, mortgages, etc.
Avoid any artificial increases in income. Artificial increases include capital gains distributions, retirement plan distributions, exercising stock options, bonuses, gifts, and distributions from qualified education account that is not parent-owned, such as a 529 college savings plan, prepaid tuition plan, or a Coverdell education savings account. To help offset some of these potential artificial increases you should plan to adjust the timing of the income or benefit so that it is not received during the current or prior tax year. Since capital gains affect your EFC as well, look into any capital losses you may have for the year and use these to offset your capital gains.
Utilizing these tactics can help the student maximize his or her need-based aid. Make sure to look into these tips to strategize a plan on how to get the most out of the FAFSA. Knowing this information prior to filing the FAFSA can help students decrease their estimated family contribution as much as possible to help them receive the maximum amount of financial aid possible. The EFC calculation can be a confusing but accessing an online resource to estimate how much you may receive prior to filing the FAFSA can give you a rough estimate of what to expect your estimated family contribution to be. Utilize these resources online so you can prepare and map out what the cost of college will look like for you or your child.
NerdWallet Study: 2018 Students missed out on $2.6 Billion of free financial aid
Although financial aid is a great way to help pay for college remember that there are other great resources out there, such as scholarships, to help reduce the cost of college.
Online Resources
Researching Schools
- College Scorecard
- College Board
- CollegeData
- College Navigator
- College Transitions
- 50 Colleges with the Most Generous Financial Aid Packages
Researching Graduation Rates and Job Outcomes
Financial Aid Forms
Financial Aid Help
- Federal Student Aid Site
- Student Loan Guru
- National Association of Student Financial Aid Administrators
The process of paying for college can be overwhelming. We would love to help. Feel free to schedule a free consultation with us.
