August 2012
Back to School! The ABCs of Financial Aid
Author and columnist Bill Vaughn once mused, “Economists report that a college education adds many thousands of dollars to a man’s lifetime income—which he then spends sending his son to college.” Any parent who has ever paid a tuition bill will certainly acknowledge the truth in Vaughn’s observation. The cost of both private and public universities has increased at a rate nearly twice that of regular inflation.
Persistent financial aid myths can intensify families’ stress surrounding the aid process. Perceptions of the system vary widely, from those who believe saving too much will decrease their chances of receiving financial aid, to those who believe not saving at all will ensure that their full financial aid needs are met.
Financial Aid 101
Financial aid falls into two categories: need-based and merit-based. There are also two main providers of financial aid: the federal government and universities. Federal financial aid, which I will focus on here, is completely need-based. The application process for federal aid begins with completing the Free Application for Federal Student Aid (FAFSA) and submitting it to each school your child wishes to be considered for financial aid. The FAFSA is required each year the student is in school and applies for financial aid. The earliest that the FAFSA can be submitted is January 1 of the year the student will begin attending college.
The information submitted on the FAFSA allows the school to determine the family’s financial need based on a straightforward formula:
Cost of Attendance – Expected Family Contribution = Financial Need
A critical component of this formula—and one that many find confusing—is the Expected Family Contribution (EFC). The EFC is the amount of money that the family is expected to contribute to the cost of the child’s education for that year. A lower EFC yields a greater financial need—and potentially a larger financial aid package. The EFC is based on two factors: the family’s level of income and assets, and whether the income and assets belong to the parent or to the child.
The EFC formula considers income and assets of parents and students as of the base year. When you are completing the FAFSA in January 2012 for the 2012–2013 academic year, the base year is 2011.)
1. Student’s income: Fifty percent of the student’s adjusted gross income over $4,500 is counted toward the EFC.
2. Parent’s income: Depending on income levels, 22 percent to 47 percent of the parent’s (or parents’) available income is counted toward the EFC. Available income is defined as the parent’s adjusted gross income after allowances for federal, state, and FICA taxes. There is also an income protection allowance based on the number of people in the household. For a family of four, with one child in college, the income protection allowance is $24,970. The parent’s adjusted available income over $29,300 is counted at 47 percent.
3. Parent’s assets: Parental assets are counted toward the EFC at a rate of no more than 5.64 percent. An asset protection allowance based on the age and number of parents in the household is also factored in. For example, for a two-parent household where the oldest parent is age 50, an asset protection allowance of $52,900 is permitted. Assets held in qualified retirement plans, IRAs, insurance contracts, annuities, and home equity are not counted when determining aid eligibility.
4. Student’s assets: Twenty percent of all assets owned by the student are counted toward the EFC. Note that this includes UGMA and UTMA custodial accounts. Beginning with the 2009–2010 academic year, however, 529 plans owned by either a student or a parent are treated as parental assets.
Parents should be aware that the EFC formula doesn’t take into account many common forms of consumer debt, such as credit card balances and auto loans. In other words, while payments toward these debts may reduce a family’s ability to pay for tuition expenses, they are not included in the EFC formula. Depending on a family’s individual circumstances, it may make sense to pay down some of these debts with assets to help lower the EFC.
Bringing it Together with an Example
Bob and Brenda Thompson age 52 have two children, Kate (18) and Joe (14) and Kate is applying to college that costs $42,000 per year. Bob and Brenda’s AGI is $95,000, they have saved $40,000 in Kate’s 529 College Savings Plan, they have $180,000 in their TSP, $60,000 in Home Equity and $50,000 in a joint savings account. Kate works as a life guard and makes $8,000 per year and has $7,000 in an account in her name from her Grandma. Here is a rough calculation of the Thompson family EFC:
1. Kate’s Income $8,000 - $4,500 = $3,500 x 50% = $1,750
2. Bob and Brenda’s Adjusted Gross Income $95,000 - $29,300 = $65,700 x 47% = $30,879
3. Bob and Brenda’s Countable Assets = $50,000 + $40,000 - $52,900 = $37,100 x 5.64% = $2,092
4. Kate’s Assets = $7,000 x 20% = $1,400
$1,750+ $30,879 + $2,092 + $1,400 = $36,121 is the Expected Family Contribution
Cost of Attendance $42,000 - $36,121= $5,879 Financial Need (may or may not be fulfilled)
The bottom line is that income is king in determining what your family’s EFC will be. Be very suspicious of anyone selling you services to increase your eligibility for financial aid. Finally, if you have qualified for the GI Bill know what a valuable asset you have! www.finaid.org is a great resource for your financial aid questions.
Persistent financial aid myths can intensify families’ stress surrounding the aid process. Perceptions of the system vary widely, from those who believe saving too much will decrease their chances of receiving financial aid, to those who believe not saving at all will ensure that their full financial aid needs are met.
Financial Aid 101
Financial aid falls into two categories: need-based and merit-based. There are also two main providers of financial aid: the federal government and universities. Federal financial aid, which I will focus on here, is completely need-based. The application process for federal aid begins with completing the Free Application for Federal Student Aid (FAFSA) and submitting it to each school your child wishes to be considered for financial aid. The FAFSA is required each year the student is in school and applies for financial aid. The earliest that the FAFSA can be submitted is January 1 of the year the student will begin attending college.
The information submitted on the FAFSA allows the school to determine the family’s financial need based on a straightforward formula:
Cost of Attendance – Expected Family Contribution = Financial Need
A critical component of this formula—and one that many find confusing—is the Expected Family Contribution (EFC). The EFC is the amount of money that the family is expected to contribute to the cost of the child’s education for that year. A lower EFC yields a greater financial need—and potentially a larger financial aid package. The EFC is based on two factors: the family’s level of income and assets, and whether the income and assets belong to the parent or to the child.
The EFC formula considers income and assets of parents and students as of the base year. When you are completing the FAFSA in January 2012 for the 2012–2013 academic year, the base year is 2011.)
1. Student’s income: Fifty percent of the student’s adjusted gross income over $4,500 is counted toward the EFC.
2. Parent’s income: Depending on income levels, 22 percent to 47 percent of the parent’s (or parents’) available income is counted toward the EFC. Available income is defined as the parent’s adjusted gross income after allowances for federal, state, and FICA taxes. There is also an income protection allowance based on the number of people in the household. For a family of four, with one child in college, the income protection allowance is $24,970. The parent’s adjusted available income over $29,300 is counted at 47 percent.
3. Parent’s assets: Parental assets are counted toward the EFC at a rate of no more than 5.64 percent. An asset protection allowance based on the age and number of parents in the household is also factored in. For example, for a two-parent household where the oldest parent is age 50, an asset protection allowance of $52,900 is permitted. Assets held in qualified retirement plans, IRAs, insurance contracts, annuities, and home equity are not counted when determining aid eligibility.
4. Student’s assets: Twenty percent of all assets owned by the student are counted toward the EFC. Note that this includes UGMA and UTMA custodial accounts. Beginning with the 2009–2010 academic year, however, 529 plans owned by either a student or a parent are treated as parental assets.
Parents should be aware that the EFC formula doesn’t take into account many common forms of consumer debt, such as credit card balances and auto loans. In other words, while payments toward these debts may reduce a family’s ability to pay for tuition expenses, they are not included in the EFC formula. Depending on a family’s individual circumstances, it may make sense to pay down some of these debts with assets to help lower the EFC.
Bringing it Together with an Example
Bob and Brenda Thompson age 52 have two children, Kate (18) and Joe (14) and Kate is applying to college that costs $42,000 per year. Bob and Brenda’s AGI is $95,000, they have saved $40,000 in Kate’s 529 College Savings Plan, they have $180,000 in their TSP, $60,000 in Home Equity and $50,000 in a joint savings account. Kate works as a life guard and makes $8,000 per year and has $7,000 in an account in her name from her Grandma. Here is a rough calculation of the Thompson family EFC:
1. Kate’s Income $8,000 - $4,500 = $3,500 x 50% = $1,750
2. Bob and Brenda’s Adjusted Gross Income $95,000 - $29,300 = $65,700 x 47% = $30,879
3. Bob and Brenda’s Countable Assets = $50,000 + $40,000 - $52,900 = $37,100 x 5.64% = $2,092
4. Kate’s Assets = $7,000 x 20% = $1,400
$1,750+ $30,879 + $2,092 + $1,400 = $36,121 is the Expected Family Contribution
Cost of Attendance $42,000 - $36,121= $5,879 Financial Need (may or may not be fulfilled)
The bottom line is that income is king in determining what your family’s EFC will be. Be very suspicious of anyone selling you services to increase your eligibility for financial aid. Finally, if you have qualified for the GI Bill know what a valuable asset you have! www.finaid.org is a great resource for your financial aid questions.
