You may have a son or daughter who is a senior in high school and paying for college is becoming a priority. The college application
process is likely making college seem oh so real.
Or you are an overachiever and starting early (thumbs up). Either way, I am here to cover some important topics around what you need to be prepared for as your child enters college and you begin to incur those costs.
You might be wondering– when should I even start planning for my child's college?
You may have already done things like fund 529 plans or other savings vehicles, but in this blog, we're talking about preparing to actually pay for college (versus save for college) the best time to start planning is what we call a student’s BASE YEAR.
A student’s base year is when he or she is beginning their second semester as a sophomore in high school. This is an important time because the FAFSA (which is submitted when your child is entering college) uses data from the previous 2 years.
Your income and assets during your child’s sophomore year will begin affecting your child’s FAFSA, so the earlier you can plan, the better off you may be.
Don’t worry, in this series we will hit some key topics for you to prepare for this next phase of your financial journey.
Ah yes, the dreaded Free Application for Federal Student Aid. The key here is the application is free, not the aid.
In response to an abundance of questions from clients about FASFA, Shane and I dive into the FAFSA in this video.
First common question: do I even need to fill a FASFA out?
The short answer is Yes.
We often get this questions because our clients think they won't qualify for any government aid because they make too much more of have too much in college savings.
Even if you think you won't qualify for government aid, we suggest that you still fill out the FASFA.
Here are 3 reasons to fill out the FASFA:
1. Most families underestimate their ability to qualify for aid
- The FAFSA is used to calculate your Expected Family Contribution (we'll talk more about this soon). This is the key determinant of you qualifying for aid. With proper planning, you can keep your Expected Family Contribution lower than you anticipated and help you qualify for aid. Aid eligibility also increases with the cost of attendance, so if attending a private school, you will increase the threshold at which you can qualify for aid.
2. Non-needs based aid - The FAFSA is often required by universities to award non-needs based aid such as merit based grants or scholarships.
3. State aid - State sponsored programs often require families to apply for government aid before being eligible for state level programs.
In short, fill out the FAFSA. Contrary to popular belief, the U.S. Department
Now you know the whole point of filling out the FASFA is to calculate a magical number known as the Expected Family Contribution. So, what is the Expected Family Contribution?
Our clients often wonder- Does the FASFA form tell me how much I have to contribute and pay toward my kid's college?
No! It does not. The Expected Family Contribution is just part of a formula that is used to determine how much subsidized student aid you can qualify for from the Department of Education.
In this next video, learn how the Expected Family Contribution works:
COA= Cost of Attendance
EFC= Expected Family Contribution
Here’s how it works: COA – EFC = How much aid you can qualify for.
The FAFSA is what is submitted to universities to determine your EFC based on your assets and income and is adjusted for the number of people in your household and how many children you have in college. The amount of subsidized aid you may qualify for depends on the cost of the school you want to attend and how much your expected family contribution is.
For a hypothetical example, let's say a family of 4 has an income of $300,000. After filling out the FAFSA, their EFC might be $60,000. So, if their daughter wants to attend Wake Forest University – which costs about $71,000/year – they would be able to qualify for $11,000 of subsidized aid each year.
The $60,000 of expected family contribution can either be paid using funds they’ve saved up or can be borrowed as unsubsidized student loans. (We explain the difference in subsidized and unsubsidized loans as well as other types of loans in a later video).
One final point– if the college you want to attend costs LESS than your EFC, (example: a state school) costing $20,000 when your EFC is $40,000 – then you would not be eligible for any subsidized aid and you would need to either cover the entire costs with savings or a traditional loan.
After you have a grasp of the FASFA and expected family contribution, understanding assessable vs. non-assessable assets is very important when calculating Expected Family Contribution.
What does assessable and non-assessable mean? This can be complicated so let myself and Shane explain in the video below:
When you are calculating EFC, some assets and some income sources count in the formula while some are excluded.
For example, assessable assets (the ones that count) include money in your checking and savings account and money that is kept in investment accounts outside your retirement plans. Non-assessable assets include the value of your primary residence, money that is in your retirement accounts such as 401(k) or IRA, and assets such as annuities and cash value life insurance.
Okay... what about income? Because income is weighted more heavily in the EFC calculation, small tweaks can make a big difference.
However, we always need to weigh the benefits of decreasing your EFC with the difference in tax burden for your family.
Some quick tips on assessable income is that:
The most important thing to remember is that these small decisions around college can make a big difference, especially when extrapolated out across four years and multiple kids. If you would like more information on EFC, college planning, or anything else we have addressed, feel free to reach out to us or check out other informational videos.
Will Koster is a financial planner with Spaugh Dameron Tenny. The experience of losing his father as a teenager helped Will find his calling in financial planning. He has a passion for working with dentists and physicians, helping them navigate their unique wealth creation journeys. In addition, Will has become the in-house expert on student loans after completing the Certified Student Loan Professional® training.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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