Forget all you’ve learned about helping to pay for college. The rules for most people aren’t what you’ve heard.
College is so expensive, especially at private schools, that most students get some form of financial aid. Some of the schools boast about the percentage of students who get aid. Even loans are financial aid, and they can be valuable tools – especially subsidized loans.
For many parents and students, the name of the game is to maximize financial aid. That is very different from maximizing savings for college. In fact, the tax and investment strategies that get widely promoted actually can be harmful in the financial aid process.
Who should care? More people than realize. The parents’ income and assets are the key factors. The grandparents’ resources don’t count. Parents with a joint income under $100,000 definitely should consider applying for financial aid. Even parents with incomes up to $200,000 might qualify, because more than income and assets are considered.
Other factors affecting aid include the cost of living where the parents reside, the number of children, the student’s grades, and the type of assets. What if the parents are divorced? Then the income and assets of the custodial parent and any stepparent are examined. The financial position of the non-custodial natural parent usually isn’t considered at all.
Here’s a summary of what parents and grandparents need to know to increase college financial aid. It is much like completing your tax return and doing some tax planning.
The first rule is that the calendar year before the child enrolls in college, known as the base year, is what counts. For a college freshman, the schools look at Jan. 1 in the second half of the student’s junior high school year through Dec. 31 of the first half of the senior year. Then the situation might be re-examined each year. You can shift income, expenses, and assets to other years to make you look most needy in that first year.
Most schools use the same application, the Free Application for Federal Student Aid (FAFSA). Some schools, especially private schools, also will require a Financial Aid Profile, which asks for additional information. A few schools will ask for supplemental data. The earliest you may complete the forms is January of the child’s senior year.
The schools will compute an Expected Family Contribution (EFC). A contribution will be expected from both the parents and the student. The EFC should be roughly the same from all schools, but it doesn’t always work out that way.
Here are the key formulas. Parents are expected to contribute up to 47% of disposable income and up to 5.6% of assets. The student is expected to contribute 50% of income and 35% of assets. There are many variables that determine whether you pay the maximum percentage or a lesser amount. The best advice is to use all the strategies you can, apply for aid the first year, and see what happens. Here are details and strategies.
Because a margin loan can count as debt, taking a margin loan against investment assets to pay for college makes you look less wealthy and increases your financial aid.
Families that have followed the traditional advice of using UGMA accounts and trusts to provide for education are at a disadvantage if the parents’ joint income and assets are low enough that they might qualify for financial aid. If financial aid is a possibility, grandparents should retain their gifts until the grandchildren graduate from college. Or the grandparents can pay tuition directly once college begins. Don’t set money aside for the child’s benefit until after graduation.
What if assets already are in an UGMA, trust, or section 528 account? You cannot take the money back in most cases. You can consider spending the money on things the child would need anyway but that don’t count against financial aid. These could include a computer, stereo or car. You cannot spend the accounts on necessities. Those are your legal obligation. The laws on these accounts vary from state to state, so you’ll need local advice on the specifics that can be done.
The financial aid rules are very complicated, almost as complicated as the tax code. I’ve only touched on the basics here. Because of all the variables, it is impossible to say who will qualify for how much financial aid at each school. You’ll need additional help. You can buy Paying For College Without Going Broke by Kalman A. Chany. Also, check the web sites www.collegeboard.com (for official information), www.collegeaidcalculator.com (for software to help calculate your likely financial aid), and www.finaid.com (for lots of information).
In next month’s visit I’ll explain why almost every one should consider using student loans to pay college expenses for children and grandchildren. The following month I’ll wrap up with a summary of strategies that let grandparents and parents find the optimum way to finance college.