What You Need To Know About College Financial Aid

 What You Need To Know About College Financial Aid: If you think you’re stressed out about college now, wait until you try to figure out how to pay for it. You’ll be doing that earlier this year than ever before. Due to Obama administration changes to the Free Application for Federal Student Aid (FAFSA®) process students applying to college for 2017­-18 can file a FAFSA as early as Oct. 1, 2016, rather than on Jan. 1, 2017. They will be required to report family income information from 2015 rather than  2016. We asked financial planner and wealth manager Scott Kahan of Chappaqua what else you need to know about college financial aid?

Why did FAFSA move their filing date up this year?

The adjustments enable students to have a better idea what their aid eligibility may be before they apply to college. Previously applications went out at year end, earlier for early decision candidates, before tax forms are filed in March. This really helps students understand their college costs before they finalize their list of target schools. It’s important to know that the approximately 200 colleges that require the CSS Profile will follow suit and accept 2015 year end data.

CSS schools tend to be private colleges and flagship state schools like University of Michigan, William & Mary and UNC Chapel Hill that have their own pools of grant money available to award. For many local families, the CSS Profile is as important as FAFSA.

Should everybody file FAFSA forms?

Unless you have the money and don’t need to borrow you should file. If you want to qualify for low interest Stafford Loans, the first loan options you should consider, you need to file FAFSA. Even if you have money set aside for three years in a 529 you should consider taking out a Stafford Loan each year. Because the loans are capped ($5,500 for freshman, $6,500 for sophomores, etc.) you may not be able to borrow all you need when you need it. And by the way, your next best loan source is in your home. The costs on a home equity loan or line of credit will be lower than college loans and is tax deductible.

First steps?

Before jumping into the FAFSA forms, find out your expected family contribution (EFC). This is something you should do even before you have defined your list of target schools.

The College Board offers an EFC Calculator that’s easy to use. You’ll need your 2015 tax returns and an estimate of your home equity and your financial assets. It will give you EFC results according to the Federal Method and the Institutional Method, which simulates the CSS Profile.

Calculate both even if you think you can’t afford private school. You may find that your EFC at a private school is not much more than a state school. All you have to do is check a box and it will report both ways.

What’s next?

Decide if you can afford a private school and begin developing a target school list. But before you set that in stone, and definitely before you apply to a school for early decision, calculate your EFC on each school’s website. Not all private colleges calculate their aid packages the same way and not all schools offer full FAFSA aid. US News & World Report offers a list of colleges that “report meeting full financial need.” This is a good short cut. If you are interested in a private school not on this list, go to the College Board website to use their net price calculator.

How do FAFSA and CSS calculate EFC?

Income is your biggest hit. It starts with your AGI from line 37 of your tax returns. Then it adds back IRA and HSA contributions and deducts health care costs. If your EFC is $50,000 and the college costs $60,000 your aid package makes up the difference. The good news is that if you have two children in school your EFC will drop dramatically. Your combined costs on both students may not be much more than your initial cost for the first child.

Your retirement assets are fully protected, as is your home equity with FAFSA. All other financial and real estate assets will reduce your aid eligibility.

What financial moves should parents make before filing aid forms?

The first rule is to fully fund your retirement accounts and HSA’s throughout your career. You can always borrow for college. You can’t borrow for your retirement. Second, having money in a child’s name is not a good idea. Student assets are counted at 20%. Parent’s money is 5% for CSS and 5.6% for FAFSA. If you have your kids’ money in a custodial account, it’s still their money. Use these funds for college prep classes or summer programs.

Should you pay off debt?

If you don’t need the money you should pay off your credit cards. If you want you can pay off home equity and auto loans. Before paying off your mortgage you should first check the policy of your target school. Home equity is protected by FAFSA but not by all private schools. Even with the ones that do, remember it saves you only 5%. So make sure you will never need the money.

How else can you unload cash or otherwise hide your money??

The best rule of thumb is to continue to fund your life needs. Don’t frivolously toss cash to keep it away from colleges. Remember they only take 5%. Don’t throw away the other 95% they would have left alone. There are small things you can do like prepaying utility bills, condo fees, etc. Keep in mind the whole college process is very stressful. Consider if the small return is worth further complicating your life.

There are many people out there with schemes to help you hide your money. But in most cases it doesn’t really work so be careful. Commissioned sales people know that life insurance and annuities are not reported on FAFSA forms and they will try to position these as a strategy to hide money from the colleges. There are two problems with this. First, they charge high fees so it may not be a good overall investment. And once you’re in the money is no longer accessible to you if you need it to pay for college or any other expenses.

Is it too late to start a 529?

You can still put money away this year and use it for expenses in 2018. 529s are the best investment for college funding. The money grows tax free if it is used for college. It can be set up in the parent’s name with the child as a beneficiary and the money can be used for any family member for college costs. Married couples can get a NY State tax deduction of $10,000 per year. The money can be used for any college expenses including computers. Use the no fee “direct plan” at NYSAVES.org. They offer a series of investments. As with all investments, the sooner you need the money the more conservative investment you should make.

Did we miss anything?

Are you subsidizing your parent’s care? If you are this may be a FAFSA/CSS income reduction. Do your parents have custodial accounts set up for your children? This could negatively affect your EFC? Find out. As with all money in your child’s name try to spend it on educational expenses.

Financial Asset Management Corporation has provided fee-only financial planning and wealth management services for individuals and small businesses in the Tri-State area since 1986. They serve 140 clients and manage over 160 million dollars in assets. FAM Corp. President Scott Kahan is a Certified Financial Planner professional. (Financial Asset Management Corp., 26 South Greeley Avenue, Chappaqua, NY, (914) 238-8900; www.famcorporation.com)

http://www.bestcolleges.com/features/best-financial-aid/

https://en.wikipedia.org/wiki/Need-blind_admission