September 2022 Update: The FAFSA Simplification Act—passed in December 2020 and scheduled to be rolled out over the next two years—introduces changes that will impact some of the advice offered here. Read about the coming changes in our article FAFSA Changes Are on the Way. Of special note is the change in how funds received from grandparents or a grandparent-owned 529 plan will be treated on the FAFSA.
“Will I qualify for financial aid or grants given my household income and assets?”
This is a common question. Before reading this long article you might want a short answer. Try this:
The Expected Family Contribution (EFC) for parents earning $220,000 with no taxable assets is $59,400 per year. So, one would be unlikely to receive much federal aid with earnings of this amount or higher. Similarly, for parents earning $175,000 with non-retirement financial assets of $200,000, the EFC is $55,000. This doesn’t mean that there wouldn’t be state or institutional need-based aid, or merit-based aid available. It’s always good to check the resources of the school and your state, as special programs do apply and can be very generous. But, at the income/asset levels described in the above examples, the information in this article will be less valuable to you.
The unknown of potential financial aid has many of us confused and without a good place to start. Could there be financial aid from federal, state, institutional, or private offerings? Does the student’s family earn too much to qualify? Is the aid need-based or merit-based? Is it in the form of loans, grants, scholarships, or work study? Can one be penalized for saving too much for college? These are just a few questions one might have. And, even if you find the answers and know all the current options and rules, they may change by the time the student arrives at their school of choice. No wonder many of us fear making the wrong choice. Hopefully this information will help!
Merit-based Aid: As the name implies, this aid is earned by the student based on academic, athletic or other achievements. Merit-based aid depends on the student, the institution or other private offerings and is very difficult to plan for in advance. But, if your child qualifies for it, it can be significant. It never hurts to investigate options at specific schools, civic clubs, churches and other private organizations and apply. For all types of aid, the earlier a student investigates and applies, the better!
Need-based Aid: There are some resources that help you determine need-based aid. Schools that offer federal need-based aid will ask the student and their family to fill out the FAFSA, or Free Application for Federal Student Aid, each year beginning in October of the preceding school year. This application determines the amount of the Expected Family Contribution. The difference between the school’s cost of attendance and the EFC creates a potential need, of which a portion may be met via aid from a federal package. This federal package may include financial aid, loans, and work study programs. The aid offered could all be in the form of loans. Many schools and most state aid agencies also use information from the FAFSA to determine eligibility for their programs. Here is an example of the calculation:
Many private schools and some public schools (UNC, UVA, Duke, Wake Forest, and Davidson are among them) also use the CSS Profile, in addition to the FAFSA, to determine eligibility for awards from the institution. Each school can add unique questions to the CSS form, so it’s difficult to know how various assets and income might affect the aid at a specific school. Because of this, we will focus on the FAFSA in this article.
The FAFSA primarily collects information about various assets and income types. The assets or income are assessed at certain rates. The assessment amount increases the EFC, thereby decreasing the amount of the financial need. Here is a high-level overview of how certain assets or income affect the FAFSA application:
When the FAFSA asks for asset values, it asks for the current value “as of today,” or the day you are filling out the application. So, if you are completing your FAFSA for the 2019-2020 school year in January of 2019, you are using the asset value as of January 2019. The following are examples of how certain assets affect potential aid:
When the FAFSA asks for earned or unearned income, they are asking for the “prior, prior” year. This sounds confusing, but really just means you’re reporting income from your most recently-completed federal income tax return. So, if you are completing your FAFSA for the 2019-2020 school year, you are reporting income from the 2017 tax return or 2017 tax year. See the instructions for the FAFSA for guidance.
A few notable comparisons from the FAFSA to the CSS Profile:
The following links take you to great tools if you would like to tinker with various impact and pros/cons of account types, balances, and income types:
Let’s calculate the potential decrease to financial aid resulting from the following 3 scenarios over a four-year period. This assumes a $100,000 beginning account balance and spending $25,000 annually from the account over the four years:
|Account Type from which $25,000 is drawn annually||Potential Decrease to Aid over a four-year period|
|Parent-owned 529 Plan||$14,100|
|Grandparent-owned 529 Plan||$18,750, assuming payments by semester ($12,500 payments made each August and January)|
Based on the above options, 529 Plans owned by the parent impact financial aid the least, if you consider how each is counted as an asset and income once distributed. But, please don’t panic if you are a grandparent and you own 529 Plans for your grandchildren! As noted above, the difference is not as drastic as one would think because of the timing of when income is picked up on the FAFSA. And, there are options, which may include:
Please keep in mind this article focused more on financial aid calculations as related to the FAFSA application, and did not address the various impact on the CSS profile. This article also did not explore the all of the income tax treatment, penalties, earnings limitations, contribution limits, or advantages of one savings vehicle over another. Information in this article also does not apply to 529 ABLE Plans, Coverdell Education Savings Accounts, or pre-paid college plans. As always, please reach out to schedule a meeting at Bragg to discuss your specific situation. We are happy to help!
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.