The average costs paid by families with students who attended private four-year colleges during the 2013–2014 academic year actually fell by 11.6% — from $39,434 to $34,855. This trend suggests that more families are making cost-conscious college decisions and taking advantage of scholarships offered to attract top students.1
The amount of need- and merit-based financial aid offered to students has increased with published tuition prices in recent years. Overall, scholarships and grants covered 40% of the average total cost for a student at a four-year private college.2
Financial need is assessed based on family income and assets relative to college costs, so a student who doesn’t receive any money from a $10,000-per-year school could qualify for need-based aid at a school that costs $50,000 per year. And it’s possible for families with six-figure incomes and typical assets to receive at least some grant aid from high-cost universities, especially if they have more than one child in college at a time.
In fact, what parents don’t know about the financial aid process could cost them thousands of dollars.
File the FAFSA
Families must fill out the Department of Education’s Free Application for Federal Student Aid (FAFSA), which is used to determine eligibility for financial aid from federal and state sources and/or for institutional funds granted by colleges nationwide. An expected family contribution (EFC) is calculated based on the information provided. The federal formula is heavily weighted toward income, and the EFC is divided by the number of children enrolled in college.
The FAFSA may be filed online beginning January 1 of the year the student will attend college. Families who don’t expect to qualify for grants may want to complete the FAFSA anyway, in case it’s needed for federal loans or merit-based scholarships.
Schools may be stricter than the federal government in assessing a family’s ability to pay. Private colleges often require applicants to fill out the lengthier CSS/Financial Aid Profile®, which unlike the FAFSA takes home and business equity into account.
Max Out Eligibility
Financial decisions made before and during college can affect the amount of aid a student might receive from the government and/or the university.
The base income year, which begins January 1 of a child’s junior year in high school, will have the most influence on a family’s eligibility. If they can, parents should postpone income to help lower their EFC, and they should avoid selling securities or a residence that would produce capital gains or result in a temporary income or asset spike.
Assets in retirement plans are not counted in the federal calculation. Thus, contributing as much as possible over time could reduce your asset base and lower your EFC. On the other hand, taking retirement account distributions to pay for college expenses typically adds to your taxable income and may increase the EFC for the following year.
Student and parent assets are treated differently: 20% of the student’s assets must be contributed each year, compared with only 5.6% of the parents’ assets. That’s why it is generally better to keep college savings accounts in the parents’ names and spend down any student assets first.
Families with substantial household savings might consider accelerating necessary expenses (such as a car purchase and home improvements) or retiring debt to reduce assets before filing their first FAFSA.
Some institutions and states grant funds on a first-come, first-served basis. Therefore, you may want to file your tax returns, complete the FAFSA, and apply for aid according to the college’s instructions as early as possible.
1–2) Sallie Mae, 2014
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.