We’re often asked how to optimize financial aid during our college planning discussions with clients. They have usually read somewhere or been told that it always makes sense to keep assets out of their child’s name.
This is not always true.
College planning is unique for each family and so, too, should be your planning strategy. You first need to determine your Expected Family Contribution or “EFC”. Your EFC is used to analyze a students’ need for financial aid using a simple formula that subtracts the student’s expected family contribution (EFC) from a college’s total cost of attendance (Cost of Attendance – EFC = Financial Need). If a student’s EFC is less than a college’s cost of attendance, then the student qualifies for need-based financial aid.
The EFC calculation takes into account the income and assets of the parents and students but, generally speaking, assets in a child’s name will account for a higher EFC and therefore a potentially lower your “financial need”. Child-owned 529 and Coverdell accounts are exceptions for FAFSA purposes, as they are counted as “parent” assets and assessed friendlier for aid purposes.
If you determine that your child will qualify for need-based aid, then it usually makes sense to spend down your child’s assets before they are included in any aid calculations. And based on the new “Prior-Prior” rule, this will now have to occur more than two years prior to when applying for aid.
But what if you determine that your child will not qualify for any need-based aid, meaning that their EFC is greater than the cost of attendance? If that’s the case, then it wouldn’t matter if your child had a million dollars of assets. At that point you need to shift gears in your planning strategy and focus on merit aid.
Merit Aid is based on your child’s academic, athletic, music and other ability, not family finances. The great thing about merit aid is that it typically comes in the form of grants and scholarships and has nothing to do with your income or assets.
The key is to find colleges where your child will be viewed favorably from an admissions standpoint. Since most colleges, especially the elite colleges, do not offer merit aid you’ll have to do your research to determine which ones do.
Financial aid is only one part of “college planning”. Start saving early and often in tax advantaged accounts such as 529 plans. As college approaches, focus on college selection to determine where your child will fit in best from a cultural, financial aid and future employment perspective. Lastly, don’t forget tax aid and how to best use your personal resources to pay your share of the cost.
This might sound comprehensive and it should be. Some private universities now cost nearly $70,000 and the average student is graduating with nearly $35,000 in student loans. You need to plan for what could be the biggest investment you ever make.
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Thanks for visiting Tushingham Wealth Strategies. Our goal is to help business owners proactively oversee all of their financial affairs by serving as their “Personal CFO” and fiduciary, so that they may live their ideal life worry-free. As part of our "Personal CFO" service, we help families develop "late stage" college planning strategies so that they can save money on college, protect their retirement assets and help their children graduate with minimal student loans. This is why our “Personal CFO” services integrate college and retirement planning into one strategy.
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