Financial aid represents money distributed primarily by the government and colleges in the form of loans, grants, scholarships, or work-study jobs. A student can receive aid from federal and/or college sources. Ideally, a financial aid package will include more dollars in the form of grants and scholarships (which do not have to be repaid) and less via loans.
If you think you will need financial aid, file early. There is currently a 21-month window to file a Free Application for Student Aid (FAFSA) for each academic year. This period begins nine months before the academic year starts on October 1, and ends at the same time as the academic year (June 30). For example, the 2018-19 academic year runs from July 1, 2018 to June 30, 2019. The FAFSA can be filed any time between October 1, 2017 and June 30, 2019. (See this post for some tips on navigating the FAFSA process.) While some schools will wait a certain amount of time before they start to review aid applications, schools generally have more aid to give away at the start of the financial aid application season. Do your best to be at the front of the line.
There are two types of financial aid: need-based and merit-based. Need-based aid is dependent on a student’s financial needs. Merit-based aid is primarily awarded due to a child’s academic, artistic, athletic, or musical talent. While the federal government and colleges provide need-based aid in the form of loans and grants, colleges are the main source of merit aid. Colleges use merit aid to help attract the best and brightest students to their campuses. Generally, colleges that provide competitive merit scholarships award them to students in the top 25% of their applicant pool.
It is also important to note that there is something akin to a gaming aspect related to tuition costs and merit aid. For the 2016-17 school year, the 411 private nonprofit schools that the National Association of College and University Business Officers surveyed reported an average discount rate of 49% for first-time, full-time students.
The FAFSA is a government-sponsored program. Most public institutions follow a specific formula to determine whether an individual is eligible for need-based financial aid. The same formula is used by private institutions, too. However, they may make some modifications to the calculations based on additional information obtained through the CSS/Financial Aid PROFILE and/or IDOC.
Types of Financial Aid
In a previous blog, we provided more information about completing the FAFSA. The FAFSA relies on tax information from two years prior. After the FAFSA is submitted, your child will receive a Student Aid Report highlighting your expected family contribution (EFC). The colleges you list on your FAFSA will also receive a copy of the report. When a college offers your child admission, the college’s financial aid department will design an aid package to help meet your child’s financial needs. This is done using a combination of the following (typically in this order):
- Federal Pell Grant (for students with exceptional financial need)
- Federal Direct Stafford Loan (subsidized* for students with financial need)
- Federal Direct Stafford Loan (unsubsidized* for all other students)
- Federal Perkins Loan, Supplemental Educational Opportunity Grant (SEOG) and work-study (the federal government allocates funds for these programs to colleges for distribution to students; eligibility depends on application timing, financial need, and availability of funds)
- College grant, scholarship, or tuition discount (at the college’s discretion)
* The federal government pays the interest for Direct Subsidized Loans while the student is in college or while the loan is in deferment. Interest begins accruing for Direct Unsubsidized Loans as soon as the money is borrowed. In other words, subsidized loans have slightly better terms to assist students with greater perceived financial need.
Unfortunately, colleges are not required to meet your child’s financial need. Oftentimes, they will meet only a portion of your need, which is also referred to as getting “gapped.” If this occurs, you will have to fund the shortfall as well as make your expected family contribution (EFC). It is also important to note that if a college says it is meeting “100% of your demonstrated need,” the college is determining your need, not you. You must also still pay your EFC.
The Expected Family Contribution (EFC)
When determining your EFC, the federal financial aid formula uses the following general rules (See this blog for guidance on which account types are considered a child’s asset, and which are considered a parent’s asset.):
- Child’s Assets: 20% of the assets held in a child’s name are typically considered to be available for education expenses.
- Parent’s Assets: Only a maximum of 5.64% of a parent’s assets are generally viewed as available to cover college costs after the asset protection allowance (APA).
- Child’s Income: Student income is counted at 50% over a certain amount – the income protection allowance (IPA). Currently, the IPA for dependent students is $6,660.
- Parent’s Income: In general, parental income is counted on a sliding scale from 22% to 47% of discretionary income (income equals adjusted gross income (AGI) plus untaxed income/benefits less certain deductions). The IPA depends on the number of people in the household and the number of college students. For 2019-20, the IPA for a married couple with two children in college is $25,400.
What Is Counted as an Asset
The following assets are counted for financial aid purposes:
- Savings and checking accounts
- Net worth of a business with more than 100 full-time employees
- A farm that is not a family’s primary residence
- Investment accounts
- Non-retirement tax-deferred savings plans such as 529 accounts
- Tax-exempt interest income
- Tax credits
- Investment property
- Other asset types
Some Excluded Assets
The following represent examples of parental assets that are sheltered on the FAFSA:
- Money in qualified retirement plans
- Life insurance policies
- The net worth of the principal place of residence
- Any small businesses owned and controlled by the family
- Assets held by others
- Personal possessions such as clothing, furniture, books, cars, boats, computer, and collectibles.
There is also an age-based asset protection allowance based on the age of the older parent which typically shelters an additional $40,000 to – $50,000 or so in assets. Note that the CSS Profile also subtracts an allowance for emergency reserves from assets.
Forecasting Financial Aid Eligibility
You can get a ballpark estimate of how much financial aid your child might be eligible for ahead of time. There are two ways you can accomplish this:
- The federal government provides an online tool – the “FAFSA4caster” – which can be used to estimate your expected family contribution (EFC).
- Every college offers a “net price calculator” tool on its website that you can use to get an estimate of how much financial aid your child might qualify for at a particular institution based on your family’s financial and personal profile.
If your child is not yet old enough to apply for college, there are tools to help you determine how much college might cost by the time your child enrolls.
Ownership of College Savings Accounts and Financial Aid
529 accounts held in a parent’s name and Coverdell Education Savings Accounts (ESA) are treated as parental assets. However, a school may use slightly different formulas to determine financial aid eligibility, which could cause accounts listed under a grandparent’s or non-relative’s name to be reported, depending on the school.
If another family member (like a grandparent) or non-relative owns the 529 plan, the account’s assets are disregarded for federal financial aid purposes. However, withdrawals in support of your student will factor into the determination of his or her financial aid two years after the distribution is made. As a result, distributions made in a grandchild’s freshman and/or sophomore year of college, could limit his or her financial aid award during his or her junior and/or senior year, respectively.
As a result, waiting to take distributions from a grandparent-owned 529 account until the last two years of college could prove beneficial. Under the current rules, this approach would ensure the distributions do not impact a grandchild’s financial aid eligibility. If such amounts are used earlier, they can increase the amount the family is expected to pay for college (and reduce aid awards two years hence) by about 50%.
It is even more complicated if a child’s parents are divorced. Only the custodial parent’s income and assets are reported on the FAFSA for a dependent student. Withdrawals from a 529 plan held by the non-custodial parent will be treated as income against financial aid, just like those held by grandparents.
Importantly, the above rules are only for federal purposes. Hundreds of universities make their financial aid awards based on the College Board’s CSS Profile form. More detailed information is required than for the FAFSA. Each school can set its own rules on how it determines need-based aid, so the reduction for assets in a 529 plan and/or ESA varies. However, it could be as much as 25% of the asset’s value. A grandparent-owned 529 plan may be included in the CSS Profile as well.
On the other hand, custodial accounts can have a more material impact on financial aid. Since the money in the custodial account is your child’s asset and not yours, federal financial aid formulas consider 20% of the money to be available to pay for college.
There can be a benefit to rolling over money from a custodial account into a 529 account. Doing so can result in only 5.64% of the account value being considered for financial aid purposes However, this cannot be done without tax consequences. You can only transfer cash into a 529 account. As a result, taxes will be due on any gains realized when selling assets held in the custodial account.
Note that not all 529 plans automatically allow you to transfer funds from an UGMA/UTMA account. You must check to see if your 529 plan allows custodial account funds to be transferred. Also, if you roll custodial funds into a 529 plan, such amounts can still only be used for the original account beneficiary. You cannot rename the beneficiary and use the assets for another person. If money is transferred from an UGMA/UTMA account to a section 529 plan, the section 529 plan should be titled the same as the UGMA/UTMA account. The money still belongs to the minor, but it remains under the custodian’s control until the minor reaches the age of trust termination. The custodian has the fiduciary responsibility to manage the money in a prudent manner for the minor’s benefit.
Some Strategies That Can Enhance Financial Aid Eligibility
You can implement strategies to try and enhance the size of your child’s financial aid award. These tools take advantage of the federal rules about the ways in which family income and assets are counted when the family’s expected family contribution (EFC) is determined.
- Time the receipt of discretionary income to avoid the base year – based on current rules for filing the FASFA, the base year is two years prior.
- Pay all federal and state income taxes due during the base year. This will reduce assessable cash and increase your tax deduction on the FAFSA.
- Have your child limit his or her income for the base year to the amount of the student income protection allowance (Currently, $6,570).
- Use cash (an assessable asset) to pay down consumer debt, which is not counted under the federal methodology.
- Use cash to make large planned purchases the year before your child starts college.
- Use counted assets to pay down your mortgage, which increases your home equity (an excludable asset).
- Shift counted assets above your asset protection allowance (a sum automatically excluded from consideration) to assets excluded by the federal methodology (home equity, retirement plans, cash value life insurance).
- Shift the child’s money into the parent’s name. Note that you may want to consult with a CPA or financial planner about the proper way to shift money.
- Use your child’s assets to pay for the first year of college, which reduces (for subsequent years) the student asset contribution factored into your EFC.
You Can Ask for More
You can lobby a school for more aid but tread carefully. A polite letter to your financial aid contact followed by a phone call is appropriate. Your chances to receive more aid increase if you can document a change in circumstances that affects your ability to pay. For example, a recent job loss, unusually high medical bills, or some other event that impacts your finances. Do not feel embarrassed about discussing your problems. There may be many others in the same situation. When you talk to the school, be realistic about what you – and the college – can contribute. Make the college understand you recognize paying for your child to attend that school is a partnership that you want to be part of; you just need a little more help.
The letter should be addressed to the financial aid director at the college your child wants to attend. You want to ask for a “professional judgement” review – the technical rule under federal law for such appeals. Sometimes having your child show a willingness to be part of the process can help. If sending an appeal to your child’s first-choice school, make sure that point – as well as how much you really want to make this work – is communicated.
In your letter, you can also ask for an appointment with a financial aid officer so you can discuss the appeal in person. If an in-person meeting is not possible, ask for one over the phone. In addition, ask the school if there is anything else your child can do to get more aid in the current or subsequent years.
If you are seeking more merit aid, you can attempt to use a better award offer from another school as leverage. Include copies of award letters received from other schools in any such request. Do not be afraid to ask one college if they will match a favorable aid offer from another college. While this strategy is less reliable, it can work, particularly if the schools are direct competitors. Before you take this approach do some research. Check the college’s website to better understand its financial aid policies. This approach will help you know what to – and what not to – ask for.
One other suggestion. If asking for more merit-based aid, even if you draft the letter, have your child submit the request. It will show that your child is vested in the process as well as their interest in attending that school. Be careful about asking for too much. If a little more aid will make a difference, make it clear that is what you are seeking. Thank the school for the package they already offered, tell them you are willing to assume your responsibility, based on what you have in savings and can take in loans. A relatively small request is also more likely to be successful than one asking for the moon.
If you do get an additional award, find out if it is just for the current year, or if it will be provided in the future.
If your child gets aid awards from more than one school, it may be difficult to compare them. To make that process easier, the College Board provides a financial-aid comparison tool. You can enter information on aid awards for as many as four schools at one time.
You can find opportunities for available scholarships online: For example, CollegeBoard Scholarship Search tool, Niche, Unigo, Student Scholarship search, Scholarship Points, Big Future – as well as tools to help you determine how much college might cost by the time your child enrolls. You can also use a free scholarship matching service such as StudentScholarshipSearch or earn points to enter random drawings for scholarships at ScholarshipPoints. You can also find more information on scholarship search platforms here.
Some Closing Thoughts
The reality is that you should not rely too heavily on financial aid. While financial aid can certainly help cover the cost of your child’s education, the biggest piece of the typical aid package is student loans not grants and scholarships.
There are several resources that provide financial aid information. These include the CollegeBoard and the U.S Department of Education. At the same time, it is also recommended that you check with your financial advisor and a qualified tax advisor to determine which approach to education savings may be best for you and your family.
This post wraps up a three-part discussion of the main issues around the financial aspects of applying for college. Earlier we discussed the FAFSA and savings vehicles. If you would like to talk to us about paying for your child’s post-secondary education, please fill out our contact form, and we will be in touch.
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Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.