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I graduated from the University of MN in 1989. At that time tuition and fees, were $2,459 per year. Today, tuition and fees will set you back over $15k. Add in room and board, books, and personal expenses and the total cost of attendance at the University of MN can easily top $30,000. At many private colleges and universities, the total cost of attendance can be double that amount – or more!
For most students and their families, financial aid for college is an important part of how they will finance their college education. Unfortunately, not all students qualify for grants or scholarships, but smart students and their families who plan ahead and understand how the financial aid system works can often pay less for college.
October 1 kicks off the start of the financial aid season. Since paying for college is top-of-mind for any parent with high school aged kids or older, I will focus the next new blog posts on the topic of how to pay less for college.
Starting with this: Below are 5 things you should know before completing the FAFSA form.
The FAFSA is changing. The FAFSA is the form used by the U.S. Department of Education to determine how much money the financial aid system thinks you can afford to pay for your student’s education.
Most of the changes to the FAFSA won’t go into effect until after the 2022-2023 academic year. Parents who have completed the FAFSA in the past will notice few differences when they complete the form this year. I will do a separate blog post on what the future changes are and how they may affect you in a later blog post.
One future change is a matter of terminology. The Expected Family Contribution or EFC will be known as the Student Aid Index. This is a welcome change as the previous term was misleading and confusing. Few, if any, families could actually afford to spend as much on college as what their EFC might have suggested.
Call it what you want, the Student Aid Index or Expected Family Contribution is the number that schools use to determine if you have financial need or not, and this is what the FAFSA is all about. Since the term Expected Family Contribution (or EFC) is still in use, I will use that term in this post.
If you are new to the process, “Financial Need” is simply the difference between a school’s total cost of attendance and your EFC (or Student Aid Index). Completing the FAFSA online determines your EFC which is used to calculate your financial need and, ultimately, how much financial aid you may qualify for. Students who may be strong candidates for Pell Grants or other forms of need-based financial aid may benefit from a lower EFC or Student Aid Index. Even affluent students who do not qualify for need-based grants or scholarships may qualify for subsidized student loans, if they can demonstrate financial need.
You will need to know the current value of your assets and your 2020 income. The EFC calculation takes into consideration the income and assets of the student and their custodial parents. This means you need to know the value of your assets as of the day you complete the form as well as your 2020 income.
Your 2020 income will be used on the 2022-2023 FAFSA form. When I say “you” or “your” I am referring to the student’s custodial parents. This includes the financial information for any stepparent that is also part of the household.
If your income was unusual in 2020 due to the pandemic, fill the form out as correctly and accurately as possible. If you experienced unusual circumstances, contact the financial aid administrator at the colleges you plan to attend to explain your situation. They have the discretion to take your circumstances into consideration when awarding financial aid.
Some assets are exempt from the FAFSA calculation. The FAFSA will inquire about your assets as well as the assets of your student. However, some assets are exempt on the FAFSA form and do not count towards your EFC.
Specifically, your home equity (of your primary residence), retirement accounts and certain business assets are exempt from the EFC calculation. Bank accounts, brokerage accounts, rental property, college savings accounts, stock options, and most other assets do count towards your EFC.
One easy strategy: If you haven’t funded your 2021 IRA, do so before completing the FAFSA. This will reduce the value of the assets that must be reported on your FAFSA. Married couples may be able to make two IRA contributions at up to $7,000 each. Likewise, your student, if they have earned income from a job, may be able to contribute to an IRA reducing the amount of the eligible assets reported.
One more: The FAFSA does not take debt like credit card debt, student loans, and mortgages into consideration when calculating the EFC. Consider using assets that increase your EFC (like a bank or brokerage account) to pay off debt like a mortgage or car payment prior to completing the FAFSA form. This reduces your EFC, but you will want to take this action PRIOR to completing the FAFSA.
Student assets are assessed at a higher rate than parent assets when calculating your EFC. If you wish to reduce your EFC as much as possible, spend their money first. If your student has their own savings or investment account, use that money to buy a computer, a car, or whatever else they will need for college prior to completing the FAFSA form.
Before making changes to your personal financial situation to qualify for financial aid for college, take into consideration any tax consequences, opportunity costs or other factors.
You can estimate your EFC online before completing the real FAFSA. The College Board website has an EFC calculator that allows a student or their family to enter different figures to determine what their EFC might be under various circumstances. Here you can enter your income and assets without actually completing the FAFSA form, and experiment with various scenarios. This exercise can help you decide if moving money lowers your EFC enough to make a difference.
If you have specific colleges in mind, go to the Net Price Calculator on each website and enter your information there as well. The best Net Price Calculators allow you to enter information regarding your student’s academic merit in addition to your financial information. Frequently, these calculators will tell you how much financial aid you may qualify for, what type, and ultimately, what you can expect to pay if you send your student to that particular school.
A lower Expected Family Contribution may not change your financial aid situation. Theoretically, a family can reposition assets in such a way that the only assets they own are those that are exempt from the EFC calculation. This will result in a lower EFC or Student Aid Index. However, this can be all for nothing if your financial need remains low.
Beware of college planning or financial aid strategies that suggest liquidating assets or buying investment or insurance products that will lower your EFC. They may, in fact, do that but a lower EFC doesn’t always result in more financial aid for college. Frequently, it does not.
Remember, financial need is the difference between your EFC and a school’s total cost of attendance. Since your previous year’s income is the biggest driver of your EFC number, and therefore your financial need, you may find that your EFC is still too high to qualify for need-based financial aid even if you have zero assets.
Before making any changes to your financial situation contact your financial professional or college financial aid officer.
To learn more about how to pay less for college, contact me directly or sign up for one of my Pay Less For College webinars through your local high school.
In the meantime, check out NerdWallet’s FAFSA Guide for additional information and resources regarding the Free Application for Federal Student Aid.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.