College Planning—Part III – FAFSA Form
Our most recent posting discussed the menagerie of potential tax deductions and credits that have been introduced to help American taxpayers fund college. Unfortunately, our legislators have approached this on a piecemeal basis, so there is very little consistency in the income limits, amounts and other qualifications needed to claim the tax breaks. One area of the education funding mix which seems to be universal, however, is the need to complete a FAFSA* form. The Free Application for Federal Student Aid or FAFSA is a form which must be completed by current and prospective college students (undergraduate and graduate). It is a pre-requisite in the United States for determining eligibility for need-based student financial aid. For parents and college age students it has become an annual fall ritual (for at least four years) as October 1 is the first day the FAFSA can be submitted for the upcoming school year. Because funding for various grants and aid is limited, wise students complete their FAFSA’s as early as possible to avoid missing out on the “first-come, first-served” allocation of these dollars. The FAFSA process allows the results to be transmitted to up to ten schools and a U.S. Department of Education policy introduced for the 2016-17 academic year prevents each school from learning which other schools are listed on a particular application.
Income and asset information for prospective college enrollees and their parents is entered on the FAFSA with the output being the Expected Family Contribution or EFC. This is the amount the family will be expected to contribute to the student’s education. A family seeking financial assistance for college will desire to keep their EFC as low as possible and in doing so, will potentially maximize financial aid eligibility. Providing fraudulent information exposes the applicant family to severe consequences and should obviously be avoided. However, informed families can benefit from being knowledgeable about the process and arranging their financial affairs where possible.
The EFC calculation process takes both parental and student income and assets into account. The needs analysis formulas are weighted toward current income and assets but do not take many common forms of consumer debt into account, such as credit card balances and auto loans. In addition, income and assets of the student are weighted more heavily, with the logic being that the student should have a greater stake in his/her own education. For example, student available income is assessed at 50% in the formula while parental available income is assessed at a much lower rate due to allowances that are not available to a dependent student. Student assets are similarly penalized when compared to the treatment of parental assets. Retirement account assets such as 401(k)’s, traditional IRA’s, Roth IRA’s etc., are not included on the FAFSA form nor are tax-deferred annuities and cash value life insurance policies. The “base year” for the first FAFSA is the “prior-prior” tax year, which for most students will be the second semester of their sophomore high school year and the first semester of the junior high school year.
Savvy readers will note some of the planning strategies implied in the previous paragraph. For instance, it is generally a bad idea (from a financial aid standpoint) to “gift” assets to the child as these sums will count more heavily against them in the aforementioned EFC calculation. Well-wishing grandparents should be made aware of this and in many cases, should utilize gifts to assist in paying off student loans after the last FAFSA has been submitted. Maximizing retirement plan contributions is a great strategy as it moves assets out of the EFC calculation and into retirement accounts that are not included. Paying off debt such as credit card balances and auto loans prior to the base year similarly reduces cash on hand and improves the EFC result.
Clearly, good financial planning can improve the likelihood of a prospective student qualifying for needs-based financial aid. If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240.
*The statements made in this posting apply only to the FAFSA form. Some private universities as well as a few state universities (less than 200 in total) also require the submission of the CSS Profile. The CSS Profile was developed and is processed by the College Board—the same organization that administers the Scholastic Aptitude Test (SAT).
