A co-worker needed information as to financial aid planning, so I started researching away. It should be noted that beyond my parent’s attempt (it should be noted that they completely failed at navigating this world), and my independent status during law school, I have very little experience in the way of college planning. If there are questions or someone out there needs additional info, I would love to try to work together to determine the answers for everyone out there.
Simple Equation to Determine Financial Aid
Financial Aid is based upon a relatively simple equation:
Cost of Attendance – Expected Family Contribution = Financial Need
There are two ways to determine EFC: the Federal Methodology and the Institutional Methodology. The Federal Methodology (FM) is the formula to determine Federal Financial Aid. The Institutional Method (IM), is the formula to determine college provided aid. The IM is set forth by each institution. Since this is a general post I am going to focus on the issue of (FM). The main issue becomes:
How is Expected Family Contribution calculated?
To figure out the EFC it is best to use one of the many calculators out there online: (http://www.finaid.org/calculators/finaidestimate.phtml).
One explanation I found of the weighted formula is:
- 50% of student’s income, plus;
- 35% of student’s assets, plus;
- 22 – 47% of Parent’s Income (depends on income level)
- 5.6% – Parent’s Assets
As you can tell, it is the child’s income and assets that matter most. However, I want to focus on the parent’s situation right now (since those are usually the clients). In a later post we can discuss the children’s assets and income, and how proper planning may decrease the EFC and thus increase Financial Assistance.
Parent’s Income includes:
- Business Income
- Farm Income
- Pension/Annuity Distributions
- Rental Income
- Royalties and Trust Income
- Untaxed Interest
- Untaxed Dividends
- Social Security Benefits
- Veteran’s Benefits
- Child Support
- Annual Contributions to Tax Deferred Savings
- IRA deductions and payments to SEP
- SIMPLE and Keogh Plans
- Housing/living allowances
- Untaxed portions of pension/annuity distributions
- Worker’s Comp
This amount is offset by Federal income tax, state/local taxes, employment allowances, social security, and living allowance depending on children.
Parent’s Assets include:
- Savings and checking
- Real estate (not included is the home in which you live)
- Trust Funds
- Education IRAs
- College savings plans
- Prepaid tuition plans
- Installment and land sale contracts
- Business/farm net worth
HOME EQUITY IS INCLUDED IN IM FOR CALCULATING EFC.
What is not included in parent’s assets for Financial Aid?
- Cash value of LI
- Retirement accounts
- Personal items (cars, furniture, etc.)
- House (IM vs. FM discussed above)
A direct conflict should be noted – Retirement accounts don’t count, but what you put in the year before Jr. heads to college does count! Yet another reason to start your retirement accounts early.
It seems to me the moral of the story is to keep assets out of child’s name!