How is Need Based College Aid Determined – Part 1
Having a child about to start college is a financially scary lifetime event. As with many other things in life, ignorance makes it scarier and harder than it has to be. There are really two different phases, one which the family has no control over, and the other that the family has much control over. We’ll discuss both.
Aid can be grants, loans or work study opportunities. As parents we want the larger proportion to be on grants and lesser on loans. This Part of this blog relates to understanding the aid application and assessment process. Part 2 discusses how to make your student more attractive to a school, with the intent of shifting the balance of aid more toward the grants, and away from the loans.
Need based aid is determined by the following calculation:
As with so many things, the devil is in the details. First, you should understand that each of these terms should not be given their normal everyday interpretation. These should be thought of as legal states. The cost of the school is determined by the school.
The expected family contribution (sometimes called what the family can afford) has two components:
- 20% of the student’s income and assets
- 5.64% of the parents’ income and assets
The students’ income and assets include what the words ordinarily mean, but also contributions from any friends or relatives (think grandparent’s endowed 529 plan money that was used the previous year for this student). A parents’ 529 plan is assessed at the parents’ rate; UGMA/UTMA is assessed at the students’ rate.
The parents’ income and assets include what the words ordinarily mean but excludes the residence and retirement account(s).
All of this information is required to be reported on the Free Application for Federal Student Aid (FAFSA) form. All need based aid is evaluated from the information submitted by the family on this form. The income data is from the previous calendar year. So, if you’re completing the FAFSA for a student entering college in the Fall of 2020, the FAFSA supplied data will come from the 2019 1040 form.
From the above we can determine a couple of quick ideas on how to maximize aid:
- Have assets in the parents’ names as opposed to students’ names
- Don’t use friends’ and relatives’ 529 plan proceeds until the student’s last undergraduate year because it will increase “what the family can afford”, and if only included in the senior year’s spending, it will never end up on the FAFSA.
An important aspect of getting need based aid is not in the above: choosing a college that is more likely to give such aid to your student. More on this in Part 2.