College Financial Aid Planning
Many factors affect eligibility for federal financial aid; therefore, all students should apply for financial aid every year even if they think they do not otherwise qualify.
The Free Application for Federal Student Aid (FAFSA) is the first step in the financial aid process. Students use the FAFSA to apply for federal student aid, such as grants, loans, and work-study. The FAFSA must be submitted for each year the student wants financial aid. If you are filing a 2021–2022 FAFSA form, the federal information from your 2019 income tax return is used.
Expected Family Contribution
The questions on the FAFSA are required to calculate the student’s Expected Family
Contribution (EFC). The EFC measures the student’s family’s financial strength and is used to determine the student’s eligibility for federal student aid. The EFC is split between an expected amount contributed from the student (usually more) and an expected amount being contributed from the parents.
Financial need is the difference between the EFC and the college’s cost of attendance (which can include living expenses), as determined by the college. The college will use the student’s EFC to prepare a financial aid package to help meet financial need.
Need analysis formula
To determine financial need, a need analysis formula measures the parents’ and student’s
assets and income. Assets are measured as follows:
Assets in the student’s name are assessed at a maximum rate of 20%, whereas parents’ assets are assessed at a maximum rate of 12%.
Assets of other children are not considered.
Specific types of property (automobiles, computers, furniture, books, clothing and school supplies, boats, and appliances) do not count as assets.
Retirement funds and pensions are generally not considered assets.
Annuities and life insurance policies are generally not considered assets.
Small businesses are excluded as assets if they are a) owned and controlled more than 50% by the student’s close family and b) the business has 100 or fewer employees. However, if the business is owned 50% or less, that portion of the business assets are included as investments. Close family include those directly related to the student’s household members and those related by current or former marriage to those people.
Consumer debt (such as a credit card balance) is not counted against assets and income.
Only debt secured by property (mortgage on home or business loan for equipment) is counted against assets and income.
Avoid selling items that will produce a capital gain during the base year (first year of financial aid application) because capital gains are treated like income.
Avoid taking money out of a retirement fund to pay for educational expenses. If distributions are made, this converts a sheltered asset into an included asset. Therefore, it is more beneficial to spend down cash in a bank account first.
Reduce parents’ income to increase eligibility for financial aid when parents’ AGI is close to $50,000. If the parents' AGI is under $50,000, then the family may qualify for the Simplified Needs Test (SNT) which disregards assets when determining the EFC.
Delay taking money from section 529 college savings plans not owned by the student or parents until the last two years of school. When used, these funds count as money received by the student and impact the EFC.
Avoid saving money in the student’s name. Assets should be saved in the parents’ name because parents’ assets are assessed at a much lower rate for determining need (12% for parent versus 20% for student).
A section 529 college savings plan saved in the parents’ name has minimal impact on financial aid eligibility, and one owned by a grandparent has no impact on the student’s eligibility.
Avoid paying the student a salary from the family business.
Spending down the student’s assets, preferably within the first year, before using any parent asset.
Put parent assets in the name of another sibling not in college because assets of other children are not considered by the need analysis formula.
Buy necessary purchases prior to applying for financial aid. Specific types of property (automobiles, computers, furniture, books, clothing and school supplies, boats, and appliances) do not count as assets.
Grandparents who wish to pay for college should pay money directly to the school to avoid increasing parental or student assets by giving money to them outright. Or, if the grandparents wait until the child has graduated, they could pay off the student loans instead.
Make maximum contributions to retirement funds because these assets are not considered by the need-based formula.
Buy life insurance policies or tax-deferred annuities because these assets are not considered by the need-based formula.
The value of bank accounts and investments is based on the day the FAFSA is prepared. Consider paying all bills before filing and before your next deposit to minimize this value.