With the turn in the calendar year comes a new FAFSA form for the 2015 year. FAFSA stands for ‘Free Application for Federal Student Aid’, and if you are a parent with a college student, you are unfortunately very familiar. The financial aid process can be overwhelming and cumbersome for many. However, there are some basic elements, which, if understood, can help simplify the process and help parents have a better understanding of the financial aid process.
Deadlines? There are several deadlines to consider when filing for financial aid. The Federal deadline for the 2015-16 school year is actually June 30, 2016. However, there are different deadlines for different programs. There are state deadlines and many colleges have deadlines as well. Some programs have limited funds available, so the sooner you can complete the FAFSA, the better. The family’s income tax return, in many cases, is a limiting factor. You are able to file your FAFSA before your return is complete, however, you will be responsible for updating your application once your return is complete. Regardless, try to complete the FAFSA ASAP.
Amount of need? The amount of financial aid your child may be eligible is a function of two elements – The Cost of Attendance (COA) and your Expected Family Contribution (EFC). The difference between the COA and EFC is your financial need. You can estimate these numbers, and your financial need, prior to submitting your FAFSA. There are numerous places where you can find the COA for the college or university your child is planning on attending. Estimating your EFC is slightly more difficult, but the Federal Department of Education offers the FAFSA4caster, which can help provide some direction. Look for the tool on the FAFSA/Department of Education website.
How does EFC work? Your EFC is an index, based on a formula, and it represents the amount your family is expected to contribute to your child(ren)’s education. The index is calculated by applying contribution rates to the assets and income of both the student and the parent. I like to explain it in terms of buckets. 2 buckets for the parents’( income and assets) and 2 buckets for the student (income and assets.) Contribution rates are applied to each of the four buckets and the results are totaled to determine your EFC. Understanding the rates the government applies to each “bucket” can help in your planning. The rate applied to the assets in the children’s name, for example his significantly higher than the rate applied to assets in the parents name.
Can I impact my EFC? One can, both positively and negatively. Families with accounts titled in their child’s name may have an opportunity to reduce their EFC (increase their need) by using those funds for purposes other than college. As mentioned above, assets in the children’s name contribute greatly to your EFC. Reducing or eliminating them can improve your financial need substantially. On the flip side, one can increase their EFC (reduce their need) unknowingly when moving assets that are excluded from the EFC calculation into the countable “buckets”. Mistakes in this realm most commonly involve the use of 401(k) loans and home equity loans. Be sure to consult with an experienced advisor to understand the impact of your actions, prior to moving forward. You may be hurting your students ability to receive aid instead of helping.
A large family helps. The majority of your EFC is driven by your income, over which most folks have little or no control. There is some relief, however, for large families. Families who claim multiple dependents, (whether they are in college or not) receive more favorable treatment of their income when calculating your EFC. Your EFC will decrease, everything else equal, with more children.
There is also some relief for families with more than one student enrolled in college at the same time. Remember, your EFC, or the amount you are expected to contribute, is a family contribution, not a per student contribution. When a second or third student enrolls, your EFC does not change, but instead gets divided amongst all the students enrolled, thereby increasing their demonstrated need.
Bottom line: Complete your FAFSA early and accurately and be careful of strategies aimed at increasing your demonstrated need. As always, be sure to work with a knowledgeable professional to help navigate the way.
Registered Representative, Securities offered through Cambridge Investment Research., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a registered Investment Advisor. Reiner Financial Group, LLC and Cambridge are not affiliated. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results