Financing College through Federal Aid

This article originally appeared in Aldrich Community, a client experience offering from Aldrich Wealth

With leaves falling and school back in session, parents can finally settle back into their routines and begin crossing items off their to-do lists after an action-packed summer. In our industry, we notice that this time of year is popular for financial planning for that reason.

Our financial planning team recently wrapped up education planning for two parents. Given the rapidly increasing cost of tuition and fees over the last decade, we inflated estimated college expenses at roughly 6% a year. This resulted in future state school tuition costs that were more than double today’s prices. As you can imagine, there was some sticker shock.

Fortunately, the “sticker price” is only an estimate using a handful of planning assumptions that are subject to change. Even if tuition costs continue to inflate in line with historical figures, the total cost does not necessarily equate to the actual price you’ll pay. In addition to tax-advantaged savings vehicles like the 529 plan, many forms of financial aid are available to those who plan. Our clients found great comfort in hearing about federal financial aid and factors that impact the ability to qualify. In sharing this with our client base, we hope you and your loved ones may share in that comfort.

The Free Application for Federal Student Aid, or FAFSA, is an application that determines how much students and their families will receive in scholarships, loans, and grants. The FAFSA becomes available on October 1^st and must be submitted by June 30^th for the upcoming school year. Don’t procrastinate! Though it is tempting to zero in on the FAFSA’s June 30^th deadline and assume there is no hurry to complete it, many institutions have an earlier deadline to file.

Several states and colleges award their aid on a first-come, first-serve basis, so we recommend completing the FAFSA as soon as possible to maximize potential aid. Lastly, it is worth mentioning that the FAFSA needs to be filed every academic year. Eligibility for assistance does not carry over from one year to the next.

Eligibility for financial aid is determined using the Expected Family Contribution (EFC). Several variables impact the EFC, including:

• Parental income
• Parental assets
• Student income
• Student assets
• Family size
• Number of siblings in college simultaneously

A student’s income and assets are weighted more heavily than a parent’s income and assets. However, since students often have minimal income and assets, parent income and assets tend to be the biggest driver of the EFC calculation. As much as 47% of a parent’s income and 50% of a student’s income are counted, as well as up to 5.64% of a parent’s assets and 20% of a student’s assets.

Depending on your financial picture, avoid putting assets in your child’s name before completing the FAFSA to improve eligibility. The FAFSA typically looks back two years, so retitling or transferring assets should be completed more than two years before the child applies for college.

Many families are surprised to find out that several assets are excluded when calculating the EFC and, thus, will not impact eligibility for financial aid. These assets include:

• Retirement accounts
• Cash value of life insurance policies
• Home equity in a primary residence
• Small businesses

Although FAFSA excludes the value of retirement accounts, elective contributions and distributions will generally be counted as income for the year.

Assets held in a student’s name are weighted more heavily than parental assets in calculating the expected family contribution. Luckily, a 529 account owned by a student counts as a parental asset for FAFSA.

Many times, grandparents also wish to contribute to a student’s education. Generally, we recommend that grandparents who want to contribute to a grandchild’s tuition make contributions into a parent-owned account instead of opening their own account. When grandparents own a 529, distributions for the grandchild’s educational expenses are considered income to the grandchild. Since the student’s income is included at a higher percentage than parents’ income, the distributions negatively impact the potential for financial aid in future years.

Starting in the 2024-2025 academic year, however, the expectation is that distributions from grandparent-owned accounts will no longer be disclosed as student income, opening the door for grandparents to own 529 plans outright again. If you’re a grandparent contributing to a grandchild’s education in any manner, we recommend revisiting your education plan with your financial advisor to determine if adjustments make sense in light of this change.

In addition to completing the FASFA, there may be another step to take. The CSS Profile, an online application administered by the College Board, partners with hundreds of colleges, professional schools, and scholarship programs to award non-federal aid. The CSS Profile requires more time and effort, but they distribute more than $9 billion in awards. You can find a list of CSS Profile Institutions on the College Board’s website.

It takes less than an hour to fill out the FAFSA. Even if that is a rosy estimate of the time requirement, the form costs nothing to fill out, and it would be well worth the time spent if it saves your family money. Education opens the door to a world of possibilities. Whether you’re a student yourself or wish to support one in their endeavors, there are many ways to plan for the rising tuition costs, and we’d love to serve as a resource to you as you prepare.