Can college funding get any more confusing? This is part 1 of a 4 part series to make sense of college funding and save you some headaches.
I have smart kids and they want to go to college. The problem is, my desire to send them to the most prestigious college is far surpassed by my bank account balance. I began researching college funding sources about a year ago and I feel that I finally got an idea of how the system works.
Now, I would like to state, I am not on expert, I am not a college admissions specialist, I am not a financial adviser. I am just a mom who has done a lot of research and spoke to quite a few college financial aid officers. Please do your own research and talk with specialists before making any big decisions. It can be very confusing and I tried to break it down for you.
Also I would like to note that I am writing this for the regular “Joe.” I am writing this for most people who live in Oak Forest with a regular paycheck and regular bills. If you own a business with more than 100 employees, invest in hedge funds, receive regular dividend checks from Apple or own a few vacation homes, you should see a financial planner because all that is over my little blue collar head.
With all that said. Let’s get started with my 4 part series: College Funding 101.
Many people call funding for college, financial aid. I don’t. The term financial aid, at least to me, has the connotation that it is just money from the government. Your child hopefully, will get money from an array of resources that are available, so just to clarify, when I say, funding for college, I am talking about multiple streams of money that comes from various sources. Because there is so much information, I will break it up into parts, this is the first part: The FAFSA and what your EFC means.
If you have high school aged kids, I am sure you have heard of it, and you might have already gone onto the online calculator to try to figure out if your kid will receive money from the federal government. If you have not, you should. I have tried to understand the calculations and specifics that come with the number spit out at the end of the website calculation though and I will try to demystify the calculations that the FAFSA uses.
General Information About the FAFSA
If you would like your child to go to college and unless you have a bank account full of money, you have to fill out the FAFSA. It is a starting point for every college, period. Like I said, unless you are walking in a plopping down the price of college in cash at the admissions desk every year, you have to fill out the FAFSA.
The information on the FAFSA will not only determine what your kid will receive in money from the government if any, but what the college itself, might be willing to give. There are many parents that do not fill out the FAFSA because they believe they will not receive any funding. You might be right and you might be wrong, but regardless you should fill it out. Colleges themselves are the largest contributors of college money in the form of grants, merit aid and scholarships. I know you don’t want to, but just suck it up and fill out the form.
What You Need To Fill Out the FAFSA
The FAFSA is looking at your financial information from 2 years prior to the year your child will enter college. For example, if your kid is entering college in the Fall of 2020 like mine, you will be using your information from the year 2018. Even if you are filling out the FAFSA in 2019, they want 2018. The information they use does not have to do with when you fill out the paperwork, it has to do with when your child will enter college.
You will need your taxes or your total income and total assets (basically the money in your bank account, but we will get to that) for yourself (and your spouse if you have one) and your child. If you have this information, the FAFSA is easy. It is an online form, and basically all the math and calculations are done for you. The online application even has a feature to import your taxes. I helped my friend do her daughter’s FAFSA last year and it literally took about 15 minutes. I am writing this more to help you understand the numbers, than help you fill out the form.
Acronyms and Buzz Words
First of all, let’s define some acronyms and some buzz words. The FAFSA and the entire college funding industry uses a ton of acronyms and buzz words and in order to really get it, you need to know what they mean.
FAFSA– Free Application for Federal Student Aid: This is the application you will fill out to begin the College Admissions. You will fill this out regardless if you will receive Federal money or not. It is the beginning and every student must fill it out with information from you, the parent(s) and them, the student.
EFC-Estimated Family Contribution-This is the amount of money that the FAFSA will determine from their calculations that your family can contribute for your child’s college. This amount is for each year your child is in college. The cost of the college does not matter, your EFC will not change. This money comes from your pocket.
FAO-Financial Aid Officer-This is the employee at the college that will determine the funding package that the college would like to extend to your child. This is a real person, and there is one at every college, in actuality, there are several at every college. But a Financial Aid Officer will be assigned to your child. They have power to extend money from the college to your child and you have the power to contact them, ask questions and even negotiate the cost of college.
FEDERAL PELL GRANTS-This is a grant given to your child for college from the federal government and it is money they don’t have to pay back. In order to receive a Pell Grant you have to apply using the FAFSA. Students whose total family income is $50,000 a year or less qualify, although these numbers are not in stone. Use the FAFSA Calculator and it will give you an idea if your child would get a Pell Grant. The Pell Grant maximum as of the 2018/2019 school year is $5,920.
DIRECT SUBSIDIZED STAFFORD LOANS-This is money, loaned to your child, for going to college. This loan is subsidized, this means there is no interest accrued while your child is in college. This loan has in interest rate for the 2018/2019 school year of 5.05% with a 1.062% fee which is taken off the top of the loan. The interest rate of the loan will be locked, but remember, you have to take out a new loan every year and interest rates may change. Your child will have to start paying this loan back 6 months after leaving college and the payments can be spread out over 10 years.
DIRECT UNSUBSIDIZED STAFFORD LOANS-This is just like the subsidized loans, with one exception, interest starts to accrue the day the loan is taken. The interest can be paid monthly or can be deferred, meaning you don’t have to pay it while going to school and it will accumulate. All deferred interest is added onto the loan and the loan will grow from the first day of school. Interest rate for the 2018/2019 school year was 5.05% with a 1.062% loan fee taken off the top.
MERIT AID-Money given in the form of scholarships from the college itself based on good grades, high test scores, or some other talent. This comes from the college and does not have to be paid back.
Now that we have some definitions out of the way, lets get started. First things first. You will fill out the FAFSA and you will receive your EFC (Estimated Family Contribution). Remember this is the amount of money that the college expects you, the parent(s) to contribute, out of your pocket, for the cost of your kid’s college, and it is for one year. So let’s break down, how they come up with the number.
First they want to know the amount of all your income.
They take your wages or “earned income”. This is your salary you receive for the year. It can include money earned from a business (net), tips, hourly wages etc. If you are married, you will include your spouse. If your are divorced, they will want only your income (the parent the child lives with more). If you are remarried, you will have to include your new spouse’s income.
They also want to know if you have any”unearned income”. This is any money you received other than your salary or wages. This usually includes interest, alimony and child support. This is added to your income.
Then they allow you to deduct some expenses from your total income.
Income Tax: This is your Federal Income tax liability, not the amount that was deducted from your wages. This is the amount you actually paid.
FICA and Medicare: This is the amount of taxes that is deducted from your salary every paycheck for social security. FICA is 6.20% and Medicare is 1.45%. This is automatically figured for you but if you want to understand the numbers, you can calculate this.
State income tax: This is amount of tax liability you owe for state taxes. Again the number they will use is your tax liability, not what you paid. This will automatically be figured for you but again, if you want to understand the numbers, Illinois State Tax is 4.95%.
Income protection allowance: This is the amount the FAFSA allows you to deduct for living expenses. This amount is EVERYTHING you are allowed to deduct for ALL your living expenses for your family. This includes food, clothing, rent, mortgage, utilities, insurance, credit card bills, car payments, etc. When I say everything, I mean everything. This is it. This amount is not reality, it is a number assigned by a chart which is below. They don’t care that you have a high car payment or that your insurance is through the roof. FAFSA has stipulated the amount of money that your family should be able to live on. The amount is determined by how many are in your family and how many are in college. This is it. The amounts are below.
Employment expense allowance: This deduction is allowed for expense from working, i.e.; transportation, babysitting, parking, etc. Again this amount is a calculation, not based on actual numbers. If you have two working parents, you can deduct 35% of the lesser of the earned income up to $4000. One parent family is 35% of earned income not to exceed $4000, and if you have two parents, but only one works, you get ZERO.
Now, Take all your income and add them together. Take all your deductions and add them together. Subtract your total deductions from your total income and you have the 1st really important number and that is your AVAILABLE INCOME (AI).
Now, they want to know about your assets.
Assets include Cash in your savings, checking, and money market funds. Assets DO NOT include your home, your cars, your jewels, your computers, or any of your stuff.
Please Note Assets also includes the net worth of a business with over 100 employees and the net worth of investments defined as real estate (do not include the home in which your parents live), rental property (includes a unit within a family home that has its own entrance, kitchen, and bath rented to someone other than a family member), trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, installment and land sale contracts (including mortgages held), commodities, etc.
They give you an amount of your assets, that is not included in the FAFSA calculation. They call it the Parents’ Education Savings and Asset Protection Allowance. It is again a number from a chart depending on your age. The chart is below, you can deduct your appropriate amount from your assets. This money is safe, they won’t use it for your calculation to determine your expected family contribution.
Now take your total assets, subtract your Asset Protection Allowance. Take this number and times it by 12%. This is your 2nd really important number. This is your CONTRIBUTION FROM ASSETS.
Now they want to know about Your Child’s Income.
You follow the same process as your income. Take your child’s income for the year and deduct the federal tax liability, the state tax and FICA calculation.
From the number you have from above, subtract $6,660. This is their Income Protection Allowance for the year. Now you have a number, times this number by .50. This number is the 3rd really important number. This is your child’s Available Income.
Now they want to know about Your Child’s Assets.
Same like yours, they want to know the total of Cash, Savings, checking, money markets in your child’s name. Again assets DO NOT include their car, their cool gym shoes, their iPhone or their stuff. Take the total amount of their assets times it by .20. This is your 4th really important number. This is Your child’s contribution from assets.
Calculate your Family Contribution
Now take your available income (1st important number) plus your contribution from assets (2nd important number) and add them together. This is your adjusted available income. Take this number and look at the chart below. Do the necessary calculation according to the chart. This is your, the parent, part of the family contribution.
Next take your child’s available income (3rd important number) plus your child’s contribution from assets (4th important number) and this equals your kid’s contribution.
Finally add these numbers together and this is your expected family contribution! Remember this is the amount that every college, no matter their cost, is going to expect your family to contribute to your child’s college education. There are a few ways around it and we will talk about that in another series.
Below is an example for calculating a family’s expected contribution.
I know this seems very confusing but once you understand the calculations it is do-able and it is important to understand the numbers because I will tell you how to save yourself some money in the next part of my series. I will also explain how to get the most of federal student aid and what you can do if you can not afford your family’s expected contribution. I think this is enough for today though. I think I need a nap!