Families seeking need-based aid for college must be mindful of what does and does not count against aid and how student- and parent-owned assets affect the loan payout.
Adam Zoll: For Morningstar, I'm Adam Zoll. Parents whose children will enter college in the next few years may have their hopes set on receiving need-based financial aid, but how can improve their odds? Here with some tips is Scott Weingold; he is the co-founder of the College Planning Network.
Scott, thanks for being with us today by phone.
Scott Weingold: Thanks for having me.
Zoll: Scott, when we talk about need-based financial aid, let's first lay some of the groundwork. What are some of the key numbers that factor into whether a student receives financial aid?
Weingold: It's a great question. Essentially it comes down to a simple formula, which is the cost of attendance--which is everything included in the school such as tuition, room and board, meal plans, and lab fess--minus what's called an expected family contribution. The expected family contribution is largely made up of assets and income of the family.
And the difference is what need they're eligible for, so if the family contribution is lower than the cost of attendance, then they're eligible for needs. If that family contribution is greater than the cost of attendance, then typically they are not eligible for any need-based financial aid.
Zoll: This income and assets is from the year before they apply for financial aid that is relevant?
Weingold: Correct, it's Jan. 1 of the junior year until Dec. 31 of the senior year, which is what's known as the base income year, and that's essentially the first year that [lending officials are] going to look at when [students] go to apply for aid by filling up the FAFSA form the following January.
Zoll: Presumably you want to reduce the amount of income and assets that count against financial aid. Let's first talk about income. Are there some strategies that families can use to try to reduce the income that's going to count in the FAFSA?
Weingold: Yes, there are some things they can do. They definitely would want to try to avoid capital gains, meaning if they have money in stocks, they'd want to keep them in stocks, at least until after the application is complete. Or if the families have the potential to sell the stocks prior to that base year beginning, then it makes some sense to do that.
They want to minimize any withdrawals from retirement accounts, so while the 401(k) assets don't count against them, if they withdraw from those accounts that's significantly going to count against them as far as increasing their income and increasing their family contribution. Those are two big ones for income.
Other things are, if they're planning on receiving a bonus at work, if there is a way to delay that bonus until after they file their FAFSA form that year, it would help them in that year that they are actually applying by waiting to get that bonus until after they actually complete the FAFSA form.
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Zoll: What about family assets? Is there a way to put assets in a place where it counts less against financial aid, or does it not matter where they are?
Weingold: No, it does matter. There are different things they could do. If it's a relatively small amount of money, they'd want to spend the child's money first because that counts against them at a higher rate than parent dollars do. If they are things that they need to buy for school like a laptop, if they need a car for the student to get back and forth to school, or certain supplies for school they needed, [they would want to spend on that]. Certain assets don't count on the FAFSA form. Life insurance cash values, annuities, home equity, and retirement accounts all do not count on the FAFSA form.
Some families will shift money from includable accounts into nonincludable accounts to essentially shelter those funds from the FAFSA formula. But they got to be careful if they are going to do that because if they need the money for college, they don't necessarily want to tie it all up where they can't get it out. If they are going to do that, they want to make sure they're still going to be able to have liquidity to obviously help pay for college.
Zoll: You mentioned student-owned assets, which count more against need-based financial aid than, say, parent-owned assets. Would you recommend that if a family were looking at buying a computer, let's say, they should use student-owned assets in order to reduce [the student's asset levels] versus parent-owned assets?
Weingold: Correct, because any dollar that a student has in their name, [lending officials] are going to assess that at a rate of 20% typically. So, if [the student has] $10,000, your family contribution is going to go up that year by $2,000, just because they had that $10,000. So, if the family kept that $10,000 where it was over a four-year period, they are going to pay $8,000 more for college because they had $10,000. So, it's counted pretty heavily against them.
So, absolutely, they'd want to use that first if there are certain things they need to buy. Again, even parent funds, if they have debts--if they have money sitting around in savings, but they have credit card debt and auto loans--credit card debt and auto loans don't count against your assets when calculating the family contribution. So, it may be wise to pay those things off and erase liquid funds to then pay off those debts that [lending officials] are not taking into consideration.
Zoll: Are these guidelines consistent regardless of the type of school you're applying for? For example, if I'm applying to a private college, will these guidelines generally work there, as well?
Weingold: Certain private colleges, in addition to the FAFSA, they'll take a form called the CSS Profile. It is a lot more in-depth. They will count certain assets that the FAFSA does not. They will look at home equity. They may look at the value of annuities. They can ask supplemental questions. They could even ask you what kind of cars you drive. So they tend to get a lot more detailed and granular.
But on the positive side to that, a lot of those schools are the schools that do have more money to give out, and they typically do award greater financial aid packages and meet a higher percentage of need than say a local state school would.
Zoll: Scott, we've talked about how this is generally a concern during junior year of high school in anticipation of these students entering college in the following year essentially. But what about once the students are enrolled, are these considerations still something to keep in mind?
Weingold: Absolutely, because you still have to go through this process every single year. So you still have to fill out the FAFSA form every year; you're still going to get a financial aid award from the school. It could be better; it could be less. You still may want to consider appealing that award. A lot of families don't know that you actually can appeal a financial aid award and technically negotiate the offer to try to get more money from the school. So a lot of families just assume it's whatever they offer you is what it is and that's what you need to take.
More often, what we're seeing nowadays is schools are underawarding families, meaning they're giving them less than the families probably should have received based on their situation and the school's history. But with the successful appeal, we're seeing more and more schools rewarding more aid after the fact by families coming back asking for more funds.
So it's just something for parents to think about when they're going through this process. But yes, they do need to go through this every single year.
Zoll: Scott, thanks. These are great tips and great information. I know it's a topic on the minds of lots of parents these days. Thanks so much for joining us today.
Weingold: No problem. Thanks for having me.
Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.
