Welcome back to “College Corner”. Our goal here is to help you develop your best college planning strategy by addressing the topics of tax planning, financial aid optimization, college selection and personal finances. If you have a question please send it our way. We recently had a prospect ask if it was worth his time to complete the FAFSA. He made over $200,000 a year and had a soon to be 17-year-old applying to colleges. He also had two other children approaching college age and anticipated his children going to private schools. My immediate answer was absolutely! There are many factors that determine a family’s eligibility for financial aid, income being only one of them.
Sticker Price of School
The sticker price of college is an important factor in financial aid determination, and here is why. Your financial aid eligibility is based on the following formula, Sticker price – Expected Family Contribution (EFC) = Need-Based Financial Aid Eligibility. EFC is the minimal amount a college will expect you to contribute towards your child’s education each year and is based on your family’s income and assets. That being said, the higher the sticker price the greater the likelihood of qualifying for financial aid. Let’s say that your EFC turns out to be $30,000. If you were to apply to a public school with a price of $30,000 that would give you aid eligibility of 0, $30,000 (cost) – $30,000 (EFC) = 0. Now let’s say you apply to a private school with a price tag of $60,000. After subtracting your EFC of $30,000 you come up with $30,000 in aid eligibility. This is another reason why we encourage most families to not ignore private schools just based on the sticker price. It is not unusual for private schools to have comparable costs to public schools after taking into account the financial aid awards. In our prospect’s case, even with $200,000 in income, he still would have qualified for thousands of dollars in aid if he had applied to some private schools.
Need-based vs Merit Aid
Need-based aid is based on the income and assets of the family. That being said, even if you do not qualify for need-based aid you would still need to complete the FAFSA in order to qualify for federal loans and work-study programs. Additionally, the FAFSA is used to determine your eligibility for many state aid packages, eligibility for private scholarships and certain school awards. Merit based aid has nothing to do with your finances and is predicated on the abilities of your child, be it academics, music or athletics. So why still file the FAFSA? A number of schools use the FAFSA to determine eligibility for their institutional aid dollars. This is the money schools hand out from their endowments to attract desirable students. If a school wants your child, usually for academic achievements, they will try to entice them with merit aid, regardless of the family’s finances. The prospect’s child had excellent grades and SAT scores which most likely would have resulted in merit aid awards at some private schools. The parents also wanted the child to have some “skin” in the game by taking out a Stafford loan. I had to explain that in order to qualify for federal loans or merit aid that he would be required to complete the FAFSA.
Number of Children in College
An often over looked factor in the aid calculation is the number of children you will have in college at the same time. Remember that your EFC will determine your financial aid eligibility and the lower your EFC the better the chances of qualifying for aid. Colleges will reduce a family’s EFC, sometimes substantially, if they have multiple children in school at the same time. The prospect we were working with would eventually have multiple children in college at once and therefore be eligible for additional need-based financial aid that he never thought was possible. As you can see there are a number of reasons to file the FAFSA, regardless of your income. Optimizing your chances for financial aid is a pivotal part of paying for college. Not only will it help your children minimize student loans but also help protect your assets and income for what they were intended for, your retirement.