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 – Wages, Interest, Dividends, 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, and 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 Cash, savings, and checking, real estate (not included is the home in which you live), trust funds, MMFs, MFs, CDs, Stocks, Options, bonds, education IRAs, College savings plans, education IRAs, prepaid tuition plans, installment and land sale contracts, commodities, business/farm net worth. HOME EQUITY IS INCLUDED IN IM FOR CALCULATING EFC.

What is not included in parent’s assets for Financial Aid?

  • Annuities
  • 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!

  • Share/Save/Bookmark
Blog Traffic Exchange Related Posts
  • My Last Income Tax Update (hopefully) I have given the readers of this blog an insight into my taxes, so I felt the need to give a conclusion to my income tax “situation” (yes, it has been upgraded to a situation).  These past updates include: Meeting my CPA Tomorrow – What should You Bring when Meeting......
  • Sallie Mae Creates New Student Loan Product to Replace Current Private Loan What is Sallie Mae? According to their website, Sallie Mae®, the nation's leading provider of student loans and administrator of college savings plans, has helped millions of Americans achieve their dream of a higher education. The company primarily provides federal and private student loans for undergraduate and graduate students and......
  • Is Social Security Income an Asset? NO! I just read a very interesting article on Wall Street Journal Personal Finance Section, titled "Save Your Nest Egg, Hold on to Stocks" written by Mr. Zweig (full article HERE).  The article surrounds the idea that since your Social Security income stream can be turned into a present value number......
Blog Traffic Exchange Related Websites