Here are a few quick thoughts on financial aid for college educations:
A parent’s income is usually the biggest factor in the calculation of a student’s expected family contribution (EFC).Â EFC is the minimum amount that the student and/or their family is expected to contribute toward the cost of college.Â The most common adjustments against income in the EFC formula are:Â federal taxes paid, state taxes paid, FICA taxes, and something called the “income protection allowance.”Â This is one time where paying more federal and state tax is actually a good thing!Â Unfortunately, most tax planning is focused toward paying LESS tax, not more.
Also affecting the calculation of the EFC are things like the amount of retirement plan contributions, how assets are listed as far as ownership, and what types of accounts the assets are held in.Â The reason that calculating the EFC is so critical is that this number is a part of what is called Financial Need Analysis.Â The formula for Financial Need Analysis is:
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Cost of Attending the College – EFC = Financial Need
The selection of a college (and its cost of attendance) is what will drive the financial need of your child.Â Because the calculated EFC is constant (it doesn’t change with the tuition because it is based on your income with the adjustments discussed previously), the financial need of the student can change.Â The financial need of a student with an EFC = $20,000 is much different if the cost of attending College #1 is $52,000 and the cost of attending College #2 is $15,000.
A couple of other things to keep in mind:
If you are unemployed, you may be considered a “dislocated worker” for financial aid purposes.Â This may increase your child’s need-based financial aid eligibility under the federal financial aid rules.
Think the FAFSA is hard?Â Well, some colleges require both the FAFSA and the CSS Profile!Â Fortunately, both of these applications can be completed online.
Many of the favorable tax credits, deductions and rates have been extended for another couple of years.Â Make sure that your tax preparer is taking advantage and making the most of these tax changes.
And finally, good luck!