College planning is a big topic for most of us parents, from the minute our children are born they become our biggest priority and so does planning to help pay their way through college one day. And then before we know it the years have gone by and it's here-they are a senior in high school and the college application process begins.
If you're reading this you’re about ready to send you son or daughter to college. Likely, you have worked hard to save money for tuition, room and board, and the occasional run to the bookstore. But while you have been saving on your own, now is the time to see what sort of financial aid packages may be available to you.
That process begins with completing your FAFSA (Free Application for Federal Student Aid) form at StudentAid.Gov. Every year, you want to complete the form as soon as possible, starting around October 31. In completing the form, you will answer questions about income, assets, liabilities and household information (number of dependents). The formula used will create what’s known as your Expected Family Contribution (EFC) which signals to colleges and universities the amount of money you can pay towards your child's college cost that year. The key word, expected.
While the form is primarily used to discover your eligibility for federal aid, it will also help determine other sources of funds including grants, assistance from the college for which you have applied and possible federal loans. It is extremely important to file your FAFSA every year because regardless of your income and aid eligibility it is an important piece of information for all colleges your child applies to to convey how much you can contribute as they prepare their offers.
It’s important to know what assets are considered eligible for paying college expenses and which will be exempt from being calculated. Your 401K savings, for example, would not be considered a part of the assets expected to pay for college. Your Roth IRA, also exempt. Even cash value life insurance policies will not be included in the FAFSA calculation. Working closely with your financial professional may help maximize your financial aid eligibility by only including reportable assets and being vigilant to not "over-report" income in the base year and the other tax years impacting your EFC.
It is recommended that every family complete the FAFSA each year. As factors like income, asset levels, and family liabilities can change from year to year, so too may the result of your eligibility to receive financial aid.
And remember, while the FAFSA and your Expected Family Contribution (EFC) are important and a good first step in your college application and review process, there are other strategies you can use during the college application process to save on the cost of college. Some of these strategies include:
1. Apply to between at least 5-10 public and private universities. Remember, sometimes private universities can have bigger endowments funds so you may end up getting a better package and pay LESS out of pocket.
2. Having several offers to similar tier universities gives you bargaining power-just like having an offer from a competing car dealership can save you money when purchasing a car-you can negotiate with universities too.
3. Remember that student assets and income count more towards your EFC so be strategic about how your assets are positioned.
4. Bottom line is you can borrow for college but you can't borrow for your own retirement. It's important to work with your financial planner to only help your child with as much as you can afford without hurting yourself financially. Remember that hurting yourself financially will only be a burden on your adult child one day IF they have to support you once you retire.
5. Once you have all the offers, compare and contrast and negotiate to find the best option for your family. Remember that college is an investment (of both time and money) and the rule of thumb is to NOT pay more in tuition that the starting year's salary amount (or at least as close to it as possible).
If you're in the midst of college planning and trying to decide how much you can afford to help your child without jeopardizing your financial future we're here to help!
For a complete list of reportable and non reportable assets see below:
Reportable assets
- Cash (checking, savings, money market accounts)
- Brokerage accounts
- Certificates of deposit (CDs)
- Mutual funds
- Stocks
- Bonds
- Stock options
- Restricted stock units
- ETFs
- Commodities
- 529 college savings plans
- Prepaid tuition plans
- Coverdell education savings accounts
- Hedge funds
- Trust funds
- REITs
- Investment real estate (not your primary residency)
- Precious metals
- UGMA and UTMA accounts
Non-reportable assets
- Qualified retirement plans, including 401(k), Roth 401(k), 403(b), IRA, Roth IRA, SEP, SIMPLE, Keogh, profit sharing and pension plans. Qualified annuities are also not counted on the FAFSA. Contributions to a retirement account during the base year, however, do count as part of total income even though the retirement plan does not count as an asset.
- Family home. The net worth of the family’s principal place of residence is not reported as an asset on the FAFSA, but is reported as an asset on the CSS Profile. When reported as an asset on the CSS Profile, the net worth is often capped at 2 to 4 times income, depending on the college.
- Small businesses. Small businesses that have less than 100 full-time equivalent employees and that are owned and controlled by the family are not reported as assets on the FAFSA, but are reported as assets on the CSS Profile. The owners of the business do not need to be listed on the FAFSA for the family business to qualify for the small business exclusion.
- Personal possessions and household goods. Clothing, furniture, electronic equipment, personal computers, appliances, cars, boats and other personal possessions and household goods are not reported as assets on the FAFSA and CSS Profile.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.