College Financial Planning From Birth to Graduation
Financial Aid Planning
One of the most important and yet most overlooked elements of College Financial Planning is Financial Aid Planning. Most people assume that they will not qualify either financially or academically for any type of aid, whether it be scholarships, grants or low-to-no interest loans.
Implementing financial aid and tax incentive plans enable a family who has not saved a great deal and is sending their son or daughter to college in the near future, to alleviate some of their family's college cost burden.
Let's start with how the schools and government determine if you qualify for financial aid.
There are two types of aid. First is Merit Aid, which is dependent on the student's skills, academically or otherwise. The next is Financial Aid, this is based on a family's income and assets. For a discussion on how to receive or increase the amount of merit aid please see Positioning the Student.
To receive financial aid, a family has to demonstrate has to demonstrate a financial NEED. Need is determined by what is called a Needs Analysis Formula. The formula is as follows
COA is an acronym for Cost Of Attendance
This the total cost of your college expenses for the year. It includes EVERYTHING such as, tuition and fees, room and board, transportation, a computer, and books and supplies. There will be different COA's for different groups or majors of students as some will have lab fees, computer fees etc.
This stands for Expected or Estimated Family Contribution. The EFC is defined as the parents' and student's ability to pay for college. It is recalculated every year. There are two methods for calculating your EFC; the Federal Method (FM) and the Institutional Method (IM). The main difference in the two formulas is the Institutional Method will assess your family’s primary residence whereas the Federal Method does not. You can own a ten million dollar house, debt-free, and the federal method does not look at it. In addition, each school may have its own way to calculate your EFC. So, in actuality, but not realistically, you can have a different EFC at each school you are applying to.
The EFC is primarily made up of the sum of four separate calculations: the contribution from parents’ income; the contribution from parents' assets; the contribution from student's income, and the contribution from student's assets. There are other factors that contribute to the Family Contribution but for the most part these four make up the majority of the calculation.
To determine the EFC you must fill out a FAFSA (Free Application For Student Aid), and depending on the school a CSS Profile.
After subtracting your family contribution from the college's cost of attendance, what is left is your Need. Your Need is simply how much aid you are eligible for.
There are a growing number of colleges that, because of a lack of sufficient aid resources, fill only a set percentage of each student's demonstrated need. For example, at a school that fills 90% of need, a student that demonstrates $10,000 in need would only receive $9,000 in financial aid.
Here is a quick example:
If a school costs $20,000 and the FEDERAL GOVERNMENT calculates your family contribution to be $10,000, your “need” at that school is $10,000.
It works like this:
$20,000 (Cost of Attendance)
- $10,000 (Family Contribution)
=$10,000 (Financial Need)
The biggest mistake parents and grandparents make is starting planning to late! Financial Aid is determined by what is called the Prior-Prior tax year. Meaning, the schools and government are using tax returns from two years prior to freshman year. For example, if your student is graduating/becoming a freshman in college in 2023, they are using 2021 tax year.
I have helped countless families qualify and/or increase both Merit and Financial aid when they assumed, wrongly, that they would not qualify. You see, there are assets that are includable in the financial aid formula and there are assets that are specifically excluded. There are also ways, 100% legal, to arrange income to qualify for more financial aid.
Always remember, every dollar that comes out of your pocket to pay for college is a dollar less, plus interest and growth, that you do no have for retirement or anything else you want to spend your money on. By using these tactics you can double or triple your eligibility for aid.