The FAFSA & College Financing
If this is new to you, FAFSA, the Free Application for Federal Student Aid is a form for prospective college students that should be completed every year. The point of the application is to determine your Expected Family Contribution (EFC). The lower the EFC number, the more financial support you may be eligible for. It’s important to know that although this is a formula used for federal aid, there are other factors that can determine what your financial aid might be from any particular school. Also, the formula for the EFC is complex and can change annually. Since FAFSA can be complex, this article is to give you a couple of tips to help you position yourself for not just a lower EFC, but more financial aid in general.
The annual cycle to complete the FASTA starts on October 1st and runs through the following June 30th. Many states award aid on a first-come, first-serve basis or until funds are depleted. Many other states have their own deadlines and can be as early as February or March. This means the earlier you apply the better the grant-to-loan ratio might be. Only two states (NY and Louisiana) have the same June 30th deadline as the federal deadline. Make sure you check with the student aid office of the schools your child is considering attending to learn those states’ specific requirements and deadlines.
In the past, there wasn’t a way to apply without your previous year’s taxes being completed. For instance, for the 2020-2021 school year, you would have needed your completed 2019 taxes for FAFSA. Now you can go back a previous year and use those taxes to complete the form. In this example, you could use your 2018 taxes. Once your current year’s taxes are complete, you can go back and update the FAFSA application.
How Different Assets Affect FAFSA
While completing the FAFSA early is an easy suggestion, the positioning of assets takes more foresight and work. The federal financial aid formula treats assets and income differently between students and parents as well as others (including grandparents and non-custodial parents). The FAFSA calculation assumes that children can use 20% of their assets for school and parents can use 5.64% of their assets. Consider how your assets between you and your child are positioned as you prepare your student for school. For most lower and middle-class families, this isn’t an issue, however, the income that a child earns may become one as they accumulate assets.
Looking at Different Assets
It is important to note, parents’ qualified retirement money does not count toward the EFC; however money used for education from these sources is considered untaxed income on the FAFSA and as much as 50% of that income is considered available for college.
Your principal residence does not count towards your FAFSA, but other investment real estate does count. Your bank accounts and brokerage accounts would count as well.
UTMA/UGMAs count as the child’s assets which means 20% of those assets are counted for the FAFSA.
While 529s can be a great tool for college savings, there is some complexity as to how they are treated towards the EFC. The 529s belonging to the student and parent are counted at 5.64% towards EFC. The assets in other 529s belonging to other relatives, such as grandparents, are not counted towards the EFC, but up to 50% of the money used for the child’s education is counted towards EFC income.
Also, while assets may increase your EFC, debt doesn’t lower it. All things being equal, it is better to have lower debt and lower assets than compared to higher debt and higher assets.
Lastly, keep in mind these are several of many areas of partial guidance. You may want to consider talking to a financial planner who has knowledge in the area of college planning.
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